Are You Willing to Bet on Thailand?

Not sure how many readers of Bangkok Diaries invest in the world of stocks and bonds but I thought I would pass along a little info about a new exchange traded fund (ETF) pegged to the Thai market. 

ETFs are mutual funds that trade on a major exchange like the NYSE.  You buy shares like you would a stock and only pay the trading commission instead of a sales commission going to the mutual fund salesman.  Also, because they are packaged as equities not only can they be shorted but many also have options trading against them so the sophisticated investor can develop a comprehensive strategy.

According to the prospectus:

The Fund is an exchange traded fund (commonly referred to as an “ETF”). ETFs are funds that trade like other publicly-traded securities and are designed to track an index. Similar to shares of an index mutual fund, each share of the Fund represents a partial ownership in an underlying portfolio of securities intended to track a market index. Unlike shares of a mutual fund, which can be bought and redeemed from the issuing fund by all shareholders at a price based on NAV, shares of the Fund may be purchased or redeemed directly from the Fund at NAV solely by Authorized Participants. Also unlike shares of a mutual fund, shares of the Fund are listed on a national securities exchange and trade in the secondary market at market prices that change throughout the day.

The Thailand ETF was created by Barclays Global Fund Advisors and tracks to the MSCI Thailand Investable Market Index. 

An interesting strategy that I’ve seen promoted is to duplicated structured notes/deposits which some banks try to talk people into.  The idea is that if you buy into these structured notes/deposits you are guaranteed 100% return of your investment in 5 years in addition to a piece of the appreciation of some index.  So, let’s say that you invest in a structured note tied to the FTSE.  In five years the bank guarantees that I’ll get my original £10,000 back plus, say, 85% of the gain made by the FTSE over those five years.  So if the FTSE was up 100% in five years I would get my £10,000 back plus 85% of the gains which amounts to an additional £8500. 

Sounds like a great deal, doesn’t it?  Well, you can do the same thing and give up none of the upside.  You simply buy a zero coupon bond (preferably from a solid issuer like the US Treasury) and then buy options on an ETF.  So, if a 5 year US treasury zero coupon bond is trading for 83 cents on the dollar you can use the remaining 17 cents to purchase long-term options.  The worst case scenario is that you make no money in 5 years (and take an inflation beating) and the upside is theoretically unlimited.  Going the DIY route means you don’t have anyone scalping off your returns and gives you liquidity that you wouldn’t have in a structured note/deposit which must be held to maturity or you risk a substantial penalty.  With ETFs If the market doubles tomorrow and you think that’s the top you can unwind your options position, sell your bond, and walk away with the cash. 

Anyway, I thought I would throw it out there.   Enjoy!