The most widely used emerging market stock index is the MSCI EM Index. For the 12 months ended in September 2011, this index returned ‐16% in dollar terms. Over that same period, the S&P 500 returned +4%. The spread between the two – almost 20% – is not insignificant for investors, many of whom have 10%‐20% in EM stocks in their globally allocated portfolios.

Yet gross domestic product (GDP) looks likely to grow only about 1.5% this year while the economies of the BRIC emerging countries (Brazil, Russia India and China) will grow collectively somewhere in the 7% range. This is a large difference and one that is likely to continue.

Ups and Downs

Why are emerging market stocks going down if the economies are doing so well? This apparent paradox underscores several important tenets of investing. First, investors don’t invest in economies; they invest in stocks, bonds and other securities. Second, markets – especially stock markets – are forward looking. And third, valuation matters.

In 2010, as we began to scale back emerging market exposure in our portfolios, some clients, understandably, asked us why. We offered several reasons:

–Many emerging economies were overheating, posing the risk of burgeoning inflation. The natural reaction by EM central banks would be an attempt to cool down the economy through tighter monetary policy. This, we suspected, could hurt stocks.

–Fund flows had gotten overly one-sided. From June 2010 through December 2010, total fund assets in EM stock mutual funds rose from $143 billion to $202 billion. That’s a 40% gain in just six months and indicative of an unsustainable move. By September of this year, assets were back down to $171 billion.

–We began to develop some particular worries related to China. Specifically, a property bubble seemed to be emerging that had/has the potential to damage the nation’s banking system. And China has been a credit-fueled success story if there ever was one, so if a tightening of credit were to occur, it would not be likely to have a positive impact. Additionally, we began to detect a pattern of increasing IPOs directed at US investors as well as growing corporate fraud at Chinese-listed companies. It had a dot‐com feel to it.

–Finally, with Ben Bernanke in charge of the Federal Reserve, we bet that monetary policy would stay easy here at home, encouraging a weaker dollar and better trade terms for large US corporations that sell globally to developed as well as emerging market countries. In many ways, the record earnings that US corporations posted earlier this year reflected the Fed’s implicit weak‐dollar policies and helped to bolster US stock prices.

Improved Metrics

A number of metrics that we use to indicate valuation for emerging market stocks as a whole have become more attractive. For example, the dividend yield of emerging market stocks is now as attractive as it’s been since 2008, and above its long-term average.

Similarly “cheap” readings are found when we look at EM price to earnings ratios, price to book value ratios, and company cash flow relative to market price. And, given our still generally bright outlook for these economies as a whole, we are more inclined to add back EM exposures to our portfolios once we see the dark clouds currently looming over the global economy and China begin to give way to clearer skies.

This article was prepared by Contango Capital Advisor’s Investment Strategy Group. Contango Capital Advisors is an affiliate of Zions Direct.

IMPORTANT NOTE: Wealth management services are offered through Contango Capital Advisors, Inc. (Contango), a registered investment adviser and a nonbank subsidiary of Zions Bancorporation. Investments are not insured by the FDIC or any federal or state governmental agency, are not deposits or other obligations of, or guaranteed by, Zions Bancorporation or its affiliates, and may be subject to investment risks, including the possible loss of principal value of the amount invested. Some representatives of Contango are also registered representatives of Zions Direct, which is a member of FINRA/SIPC and a nonbank subsidiary of Zions Bank. Employees of Contango are shared employees of Western National Trust Company (WNTC), a subsidiary of Zions Bank and an affiliate of Contango. CCA1011-0177

At the time of this writing President Obama and congressional leaders of both parties have evidently agreed to a framework for a budget deal that would cut trillions of dollars in federal spending over the next decade and clear the way for an increase in the government’s borrowing limit.

While this move enables the country to skirt a default, most of the damage has already been done, at least as far as the investment community is concerned. A technical default would have been terrible, of course: We have commented before on the likely negative consequences, both for asset values and for the real economy, that would follow. But, more fundamentally, the circus of the last months has demonstrated that our political process is incapable of generating an intelligent consensus on tax and expenditure.

The implications are profound. Investors in US obligations, as well as in US-guaranteed obligations such as agency bonds, now anticipate a variety of problems. Chief among them are the potential for the US to be viewed as a second-tier lender, a perception that could impair liquidity and increase the prospect of runaway deficits that could trigger real defaults or, more likely, prompt efforts to eliminate debt by allowing inflation to surge. The US, in short, has lost credibility, while its debt has lost credit quality. Thus, we expect the US to pay higher interest rates across the entire yield curve in the future. And, because all other domestic interest rates are based on Treasury rates, every borrower in US dollars will pay more to borrow.

Higher Hurdles

Let’s estimate roughly what this extra cost might be. Total non-financial debt (the debt of all households, companies and local, state and federal governments) is about 240% of today’s gross domestic product (GDP). If the extra borrowing cost is only 1% – although we fully expect it to be more – then this adds 2.4% of GDP to interest paid. Remember, on average (that is, not during a recession), total federal revenues are a little less than 20% of GDP. This extra burden, then, is equivalent to a 12% increase in the federal tax take from the economy. Add the following fact: Corporations view “cost of capital” as a risk premium above the cost of debt. Hence companies contemplating whether to make an investment will face a hurdle rate that has risen by that same 1% and so will almost certainly decide to take advantage of fewer opportunities. Similarly, families will face higher mortgage, car and credit card interest bills, and so will buy less. There will be slower growth in the real economy and a prolongation of high levels of unemployment.

Redistribution of Wealth

All such changes also entail the potential for enormous wealth redistribution. The Federal Reserve’s current “zero interest” policy transfers real purchasing power from savers (who are earning yields below the rate of inflation on their savings) and transfers it to borrowers (including, especially, our big federal borrower). A jump in the yield curve will shift the transfer of money the other way. Savers will earn more on investments with a floating yield or a fixed yield set after (but not before!) the jump in rates.

Anyone unfortunate enough to own a long maturity bond today will take a large capital loss when interest rates rise. Insurance companies and pension funds are particularly vulnerable. And, if the rate that investments must earn to repay the cost of capital rises, stock prices will fall until their returns (on this now lower base) meet the new target. Because the stock market anticipates changes, we expect that a lot of this reasoning is already priced into stocks.

In this environment, much of the baby-boom generation will find that it is even further from having sufficient assets on which to retire comfortably.

Send a thank-you card to your congressman, your senator and the president.

George Feiger, CEO of Contango Capital Advisors and the author of the preceding article, has recently been quoted by media outlets including BBC NewsHour, Bloomberg News, Bloomberg TV, Chicago Tribune, CNNMoney.com and The Globe & Mail. Mr. Feiger’s past positions include Global Head of Onshore Private Banking for UBS, Global Head of Investment Banking at SBC Warburg and senior partner at McKinsey & Co. Formerly an associate professor of finance at Stanford University’s Graduate School of Business, he holds a PhD in economics from Harvard University.

Contango Capital Advisors is the wealth management arm of Zions Bancorporation (www.contangoadvisors.com). Contango Capital Advisors is an affiliate of Zions Direct.

By adhering to the five basic principles that follow, you can greatly improve your long-term prospects for investing success.

1. Develop a real plan

You must work back from your purpose in investing. For example, if you are investing for retirement, you should have a good idea of:

- When you will retire
- The type of life you will be comfortable leading
- How much you are likely to spend in retirement
- What your current assets are
- What you can expect to save between now and retirement
- Whether that amount will be enough to meet your requirements
- What you might reasonably anticipate earning on your assets
- Your options if something goes wrong: For example, could you return to work?

Developing answers to such questions – even though those answers may change over time – can shed significant light on how much you will need to invest, how you may want to invest it and what other steps you should consider taking.

2. Anticipate the worst, not the best

Don’t live in a dream. Your house could fall in value not rise. Stock returns might have gained value over the last 20 years, but may not rise in the next 20. Anticipate returns on the bad side of average and work with those. No one ever complained about ending up with more money than expected.

Maintaining an emergency fund can also help make sure that you’re able to meet unanticipated financial needs – and prevent you from being forced to sell assets you’d be better off holding.

Finally, calculating conservatively will induce you to save more, expect less and not to bet big on the latest hot idea. This is never a bad thing.

3. Figure out what price to pay

The market price for an investment isn’t always the “right price.” Our world works in fits of enthusiasm and waves of revulsion. Think of the Internet bubble, think of the notion that real estate would always go up or that emerging market stocks should be bought “because” China was growing faster than the US.

Then think what happens if you overpay for an investment by, say, 25%. You will have to earn that much in “real” value merely to end up even. If your investment timeframe is a couple of decades or more, paying the right price is not so critical. But most people earn and save more in their 40s and beyond than they do in their younger years. They may not have multiple decades to make up for mistakes.

4. Keep learning and evolving as the world changes

Over the years, both opportunities and risks can shift dramatically. Keep an eye out for such shifts – and for their implications.

For example, as we already know, not all government entities turn out to be sound investments. We also have a pretty good indication that, in the future, emerging markets will account for much of the world’s growth. Global warming could mean that farmland in Oklahoma goes from being a “good” investment to a “bad” one. Perhaps inflation will be much higher than it has been over the last 20 years.

Keeping your plan on track is an ongoing job. You can’t just make some decisions, however good, at the beginning and then put your portfolio on autopilot. Investing requires ongoing inquiry into economic and financial market developments – it is real work.

5. But be keenly aware of what you don’t know

You must learn and change, but you also must do so deliberately and thoughtfully. We are bombarded by media “experts” telling us that now is the time to do something drastic and buy all sorts of exotic investments that promise all upside and no risk. Let’s get real: Why should anyone share a true bonanza with you? If it’s so great, why do they need your money?

Most investors are much less well-informed about the real value of opportunities and risks than are the institutions with which they invest. There are no sure things. Even the cleverest people make mistakes. Expect only modest returns and avoid extravagant promises.

George Feiger is chief executive officer of Contango Capital Advisors, the wealth management arm of Zions Bancorporation (www.contangoadvisors.com). Contango Capital Advisors is an affiliate of Zions Direct.

Cartoon Copyright © John Martin with the permission of John Martin and Cartoonstock.com. All rights reserved.

Take a concrete example. You hold a portfolio of stocks of financial institutions. During the recent credit crisis, these fell significantly in value and many stopped paying dividends. If you hold them in a 401(k) or IRA and if you are in your 30s or 40s and will work for several more decades, their problems probably don’t mean much to you. The share prices have recovered significantly and the dividends are being restored.

From the perspective of an investor with a 20-year time horizon, the decline in price and interruption of dividends was no more than a (rather large!) bump in the road. On the other hand, if you are retired and living on the dividends your investments generate, it was a disaster. Not only was your dividend income from these securities reduced dramatically, but you may have needed to sell a large part of your very depleted portfolio to generate cash … meaning your portfolio may never fully recover even if the stock prices do.

Assessing Liquidity Risk

Similar issues surround liquidity risk – the risk that you will not be able to sell an investment at a “reasonable” price at a time when you need money. Illiquid investments span the spectrum from commercial buildings to oil and gas royalty partnerships. Between 2008 and 2010, such assets could only be sold at fire sale prices. For people with a large cushion of cash or more liquid securities, this illiquidity may have been a nuisance but was probably not a problem. For those who had tied up most of their net worth in “great but illiquid” assets, this period has brought severe financial difficulties.

These examples illustrate that the only effective way to handle financial risks is in the context of a personal financial plan. Such a plan lays out your needs for regular cash flows, how much access to liquidity you might need to pay for college, buy a vacation home and the like. Against that you can array your financial resources: income from work, income from financial assets, and the market, credit and liquidity risks of the assets you hold. You can then test the ability of your current investment portfolio to meet your needs by looking at the financial risks intrinsic to the assets.

When Bad Things Happen

This last step is essential but complex. You can look backward and ask what bad things have happened to these assets in the past, and you can look forward and ask what the current and likely state of the economy and the markets might imply about risks in the future. The past is handy – it actually happened. In contrast, looking forward is only conjecture. But you must look forward. Recollect the widely held belief that “house prices will never fall – they haven’t fallen since the 1930s.” A look at the unprecedented increase in house prices between 1995 and 2007, fueled by unprecedented increases in consumer debt, might have given you pause – leading you to consider whether those extravagant housing prices were sustainable.

Such an analysis will help identify the types of risk that are critical to your situation, enabling you to change your savings level and your portfolio to try to mitigate the impact of the bad things that might happen.

George Feiger is chief executive officer of Contango Capital Advisors, the wealth management arm of Zions Bancorporation (www.contangoadvisors.com).

The information contained in this document is not intended to be and should not be construed as tax advice. It is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code. Contango Capital Advisors does not engage in the business of providing tax advice and estimates should not be construed as such. Clients should consult their tax professionals regarding their personal situation prior to taking any action based upon this information. CCA0611-0108

]]> http://think.zionsdirect.com/2011/07/05/thinking-about-financial-risks/feed/ 0 http://think.zionsdirect.com/2011/06/07/zions-direct-announces-municipal-bond-auction-results-8/ http://think.zionsdirect.com/2011/06/07/zions-direct-announces-municipal-bond-auction-results-8/#comments Tue, 07 Jun 2011 15:00:30 +0000 Russell Fisher http://think.zionsdirect.com/?p=9412 Read More]]> Auctions of Municipal Bonds for week ending June 3, 2011

SALT LAKE CITY – Zions Direct, the online broker-dealer that allows its customers to purchase municipal bonds in its daily web-based auctions, announces their weekly auction results. In auctions closed from May 30, 2011 to June 3, 2011, investors purchasing municipal bonds in the auctions received average tax-exempt yields 0.98 percentage points, or 98 basis points, higher than similar bonds as reported by the Municipal Securities Rulemaking Board (MSRB).

Zions Direct, in conjunction with BondDesk Group LLC, regularly publishes a Market Snapshot for investors to help understand the current bond market, summarizing current weighted-average yields of investment-grade municipal and corporate bonds. Findings are compared against similar securities auctioned at Zions Direct Auctions. Since February 2007, Zions Direct has auctioned over 750 million dollars in more than 2,000 fixed-income auctions.



ZIONS DIRECT / BONDDESK® MARKET SNAPSHOT

Municipal Bonds’ Average Yields Trade Data (source: MSRB)

Municipal Bond Auction Comparison Data (auction data from auctions.zionsdirect.com)

For more information on Zions Direct and the BondDesk Market Snapshot go to zionsdirect.com to sign up to receive the free weekly newsletter or visit think.zionsdirect.com to view a Market Snapshot archive.

THE INFORMATION IN THE MARKET SNAPSHOT IS NOT INTENDED TO SERVE AS THE BASIS FOR INVESTMENT DECISIONS. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RESULTS.



About Zions Direct

Zions Direct is a broker-dealer that specializes in offering securities for self-directed and fixed income-focused investors. Zions Direct allows retail investors to buy FDIC-insured certificates of deposit and corporate and municipal bonds through its web-based Bond Store and auction platforms. In addition, clients can invest in stocks, mutual funds, and exchange-traded funds online or through a Zions Direct financial representative.



About BondDesk Group LLC

BondDesk Group LLC is a financial technology firm, providing enterprise-wide fixed income solutions to many of the top broker-dealers in North America. The BondDesk Alternative Trading System (ATS), run by BondDesk Trading LLC, connects broker-dealers through a centralized marketplace by offering a diverse pool of liquidity for odd-lot fixed income securities in multiple asset classes. The BondDesk ATS executes over 20,000 transactions per day by providing 2,000 broker-dealers access to 35,000 live and executable offerings from over 100 premier fixed income dealers. In addition, BondDesk Group is a leading provider of innovative fixed income wealth management solutions, advisor workstations and fixed income analytical tools and applications.



Market Snapshot Information Disclaimer

MSRB bond trade data displayed as weighted average yield. Municipal bond information from MSRB as of June 3, 2011. The Trade Data was developed by BondDesk Group based on information from MSRB’s Real-Time Transaction Reporting System, and excludes transactions in taxable bonds. Auction information from auctions.zionsdirect.com as of June 3, 2011. The aggregate rating for each bond is based on average ratings from Moody’s and S&P (when available).

Although information in this Market Snapshot is believed to be reliable, Zions Direct and BondDesk make no express or implied warranties of any kind regarding this information, including as to its accuracy or completeness. Auction data excludes bonds in undersubscribed auctions.

Municipal bonds are exempt from federal tax and may or may not be tax-exempt in individual states. The inclusion of municipal bonds selected by tax-exempt status is generated from pertinent federal tax attributes as populated from Muller, IDC, and/or BD ATS data sources.

Terms are defined as follows: < 9 months = anything up to .75 years to maturity; 1 year = anything greater than 0.75 years up to 1.5 years to maturity; 2 years = anything greater than 1.5 years up to 2.5 years to maturity; 3 years = anything greater than 2.5 years up to 4 years to maturity; 5 years = anything greater than 4 years up to 6 years to maturity; 7 years = anything greater than 6 years up to 8.5 years to maturity; 10 years = anything greater than 8.5 years up to 11.5 years to maturity.

Investment products and services offered through Zions Direct, member of FINRA/SIPC, a non-bank subsidiary of Zions Bank are NOT insured by the FDIC or any federal or state governmental agency, are NOT deposits or other obligations of, or guaranteed by, Zions Bancorporation or its affiliates, and MAY be subject to investment risks, including the possible loss of principal value or amount invested. FDIC-insured CDs are insured up to $250,000 per individual account holder per bank.

That being said, with the availability of online investing, and after evaluating their circumstances and investment objectives, investors are learning how easy it is to take advantage of some of the benefits of buying individual bonds. Hence, without much publicity, it appears to this author that the argument has quietly shifted in favor of investing in individual bonds.

In order to understand why this shift is occurring, it is important to first understand both sides of the bond funds versus individual bonds argument. Most writings on the subject have focused on the following investment traits:

                                                            (1) Diversification
                                                            (2) Reinvestment of income
                                                            (3) Investment control
                                                            (4) Cost
                                                            (5) Interest rate risk
                                                            (6) Liquidity
                                                            (7) Portfolio size

A brief discussion of each of these investment traits is outlined below.

(1) Diversification
Bond Funds: Because the underlying portfolio of most bond funds includes many different types of bonds of various maturities, investing in a bond fund conveniently provides the investor with immediate and widespread diversification. With numerous different bonds represented in the fund, the investor’s exposure to the default /credit risk of any one issuer is minimized.

Individual Bonds: In this author’s opinion, in order to achieve adequate diversification with the purchase of individual bonds, investors need about $100,000 or more invested in bonds of approximately 15 different issuers. The impact of a default will be greater within a portfolio of individual bonds than with a bond fund, because of the numerous and diverse holdings within a bond fund. When buying individual bonds, default /credit risk in most cases is addressed by limiting investment to essential purpose, high quality investment grade (preferably “A” or better) bonds.
                                                            Advantage: Bond Funds

(2) Reinvestment of Income
Bond Funds: Bond funds pay interest monthly in a fluctuating amount. Payments are based upon the interest received from the sum of all the investments held in the fund. As a result, the amount of income received varies each month. Because an investor can choose to automatically reinvest income by purchasing additional shares on a monthly basis, low yielding cash investments are typically held to a minimum.

Individual Bonds: Because individual bonds pay interest on a fixed, semi-annual basis, an investor is generally limited to reinvesting the income in short-term cash instruments until that amount exceeds $5,000. At that point in time, an additional $5,000 bond may be purchased for reinvestment.
                                                            Advantage: Bond Funds

(3) Investment Control
Bond Funds: When purchasing a bond fund, investors surrender control to the fund manager to make all investment decisions. An investor’s involvement is limited to matching investment objectives and portfolio duration with the information contained in the fund prospectus. In addition, with investment in a bond fund, investors have no control over how much income they will be receiving during any particular period. Nor does an investor have any control over the timing of capital gains taxes, or determining whether or not bonds inside the fund portfolio are subject to AMT (alternative minimum tax) or are subject to the investor’s state income tax.

Individual Bonds: Decision making responsibility and investment control remains with the investor when purchasing individual bonds. Individual bonds can generate a relatively predictable income with semi-annual interest payments and are redeemed at specific maturity dates. The investor has the opportunity to review the appropriateness of each investment including the use of AMT bonds and bonds issued from within the investor’s home state. The investor purchasing individual bonds is also able to decide the type of issuer, maturity dates, call provisions and credit parameters for each investment.
                                                            Advantage: Individual Bonds

(4) Cost
Bond Funds: A bond fund may be purchased online through a brokerage account; and investors pays annual management fees and bond fund expenses. Shop carefully because these fees and expenses can range from .25% to 1.25%. A word of caution: depending on the bond fund selected, there can also be an up-front sales commission (load) charged (loads typically range from 2% to 4%) on the amount invested.

Individual Bonds: Traditionally, the cost of purchasing an individual bond was either the broker’s commission or an unknown (to the investor) mark up on the price of the bond. Now individual bonds may be purchased online for an exact price at a flat commission per trade (for example: $10.95 per transaction with Zions Direct. Full Disclosure: Zions Direct is a non-bank subsidiary of Zions Bank, where I am a SVP and business development officer.), regardless of the dollar amount of the transaction. Online brokerage websites offer thousands of bonds representing the secondary market inventory of many broker/dealers. After individual bonds are purchased they are held in individual brokerage accounts and principal and interest is received, call redemptions (if any) are automatically processed and year-end tax information is provided.
                                                            Advantage: Individual Bonds

(5) Interest Rate Risk
Bond Funds: Because bonds in a bond fund are constantly being bought and sold, there is no specific maturity date for the money invested in the bond fund. Like all fixed income investments, the money held in the bond fund is subject to interest rate risk (an inverse relationship exists: when interest rates increase bond prices decrease and vice versa). Hence, when shares are liquidated they are sold at the current net asset value (NAV); and, depending on interest rate levels, the sale could result in a potential loss of principal. Generally, the risk of price volatility and fluctuating principal is higher for bonds with longer maturities.

Individual Bonds: Individual bonds have a defined maturity date. Interest rate risk is avoided by purchasing individual bonds with the intention of holding them to maturity. The market price of any fixed income investment fluctuates prior to maturity based upon the level and direction of interest rates. As a result, barring a credit default, if a bond is held to maturity it provides principal protection by being redeemed at par value, regardless of prevailing interest rates.
                                                            Advantage: Individual Bonds

(6) Liquidity
Bond Funds: With bond funds, liquidity is readily available. If a person needs money for an unexpected expenditure or desires to change asset allocation percentages, an investor may sell shares of the fund at anytime at the current NAV less redemption fees, if applicable. As previously mentioned, depending on interest rate levels, the sale could result in a potential loss of principal. Liquidating a portion of the bond fund changes the amount of the fixed income investment and does not change the characteristics of the fund portfolio.

Individual Bonds: Individual bonds can also be sold prior to maturity. The prices for bonds sold in the secondary market are influenced by prevailing interest rates and like mutual funds could be sold for more or less than the original investment. If some bonds are less liquid than others, those bonds may be subject to greater price volatility.

It is important to note that short term objectives and short term investments should not be mixed with long term objectives and long term investments. Hence, liquidity is best accomplished by holding money in short term cash instruments in order to provide funds for unexpected needs. Fixed income objectives should then be met by separately purchasing bond funds or individual bonds that will be held to maturity.
                                                            Advantage: Bond Funds

(7) Portfolio Size
Bond Funds: Most bond funds have an initial minimum investment of $5,000 and allow the investment of any dollar amount above the initial minimum. Hence, an investor is able to make a fixed income investment in a bond fund with a relatively small amount of money. Nor does the investor have a size constraint other than what prudence dictates by way of diversification needs and asset allocation strategies.

Individual Bonds: Most individual bonds are sold in $5,000 denominations and may be purchased in much larger blocks depending on the investor’s net worth and available funds. However, in my opinion, portfolio size of much under $100,000 doesn’t give an investor adequate opportunity to achieve an acceptable level of diversification either by issuer, bond type or maturity.
                                                            Advantage: ?

Conclusion
So what’s the answer? Is it more advisable to invest in bond funds or individual bonds? Is the answer still determined by the summation of each investor’s individual circumstances and investment objectives? Let’s suggest an answer by reviewing some of the more obvious conclusions and allowing the reader to decide his or her own investor profile.

If an investor (a) desires as much diversification as possible in order to protect against default/credit risk, (b) is looking for a quick entry into the fixed income market with the on-going convenience of automatic reinvestment of interest earnings, (c) chooses not to be involved in the underlying investment decisions, (d) understands interest rate risk and that there could be a loss of principal if interest rates are higher when shares are sold, and (e) is willing to pay management fees and fund expenses………then buy a bond fund.

On the other hand, if an investor (a) has at least $100,000 or more of investable, fixed income assets, (b) wants to retain investment control, (c) desires relatively predictable income, (d) intends to protect principal by holding bonds to maturity, and (e) is looking for lower expenses by virtue of buying bonds online directly from the secondary market.…..…then buy individual bonds.

It is this author’s opinion that gradually more and more investors will be attracted to the advantages of purchasing individual bonds. And as investors learn the ease of buying individual bonds online, the investor shift from buying bond funds to buying more individual bonds will likely accelerate.

Nevertheless, decide which type of investor profile you are and start investing!

Larry Denham, senior vice president and business development officer for Zions Bank.

]]> http://think.zionsdirect.com/2011/05/25/a-tale-of-two-strategies-bond-funds-vs-individual-bonds/feed/ 5 http://think.zionsdirect.com/2011/05/12/zions-direct-announces-fdic-insured-cd-auction-results-3/ http://think.zionsdirect.com/2011/05/12/zions-direct-announces-fdic-insured-cd-auction-results-3/#comments Thu, 12 May 2011 15:00:18 +0000 Russell Fisher http://think.zionsdirect.com/?p=9022 Read More]]> Results for Auctions of FDIC-insured Certificates of Deposit through May 10, 2011


SALT LAKE CITY – May 12, 2011 – Zions Direct, the online broker-dealer that allows its customers to purchase FDIC – insured Certificates of Deposit in its daily web-based auctions, announces their weekly auction results. In auctions closed from May 4, 2011 to May 10, 2011, investors purchasing FDIC-insured CDs in the auctions received average yields 0.51 percentage points, or 51 basis points, higher than average yields on similar CDs as reported in Informa Research Services Top 50 National APYs, May 10, 2011.


Zions Direct regularly publishes data from CDs auctioned at Zions Direct Auctions compared against similar securities offered in the marketplace in their Market Snapshot. Since February 2007, Zions Direct has auctioned over 750 million dollars in more than 1,750 fixed-income auctions.


ZIONS DIRECT AUCTIONS MARKET SNAPSHOT


FDIC-Insured Certificate of Deposit Data*

Total Average Difference (basis points): 51


For more information on Zions Direct and the Market Snapshot go to zionsdirect.com to sign up to receive the free weekly newsletter or visit think.zionsdirect.com to view a Market Snapshot archive.


THE INFORMATION INCLUDED IS NOT INTENDED TO SERVE AS THE BASIS FOR INVESTMENT DECISIONS. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RESULTS.


*See Additional Disclaimer for data source information.


About Zions Direct


Zions Direct is a broker-dealer that specializes in offering securities for self-directed and fixed income-focused investors. Zions Direct allows retail investors to buy FDIC-insured certificates of deposit and corporate and municipal bonds through their web-based Bond Store and auction platforms. In addition, clients can invest in stocks, mutual funds, and exchange-traded funds online or through a Zions Direct financial representative.


Investment products and services offered through Zions Direct, member of FINRA/SIPC, a non-bank subsidiary of Zions Bank are NOT insured by the FDIC or any federal or state governmental agency, are NOT deposits or other obligations of, or guaranteed by, Zions Bancorporation or its affiliates, and MAY be subject to investment risks, including the possible loss of principal value or amount invested. FDIC-insured CDs are insured up to $250,000 per individual account holder per bank.


Additional Disclaimer


Zions Direct Auction CD yields are from auctions ending May 4, 2011 to May 10, 2011. A weighted average is calculated when multiple CDs of similar terms are sold through platform. FDIC-insured CDs with terms of 1 month are noted as 1 month; 2 months are noted as 2 months; 3 – 4 months are noted as 3 months; 5 – 7 months as 6 months; 8 – 10 months as 9 months; 11 – 17 months as 1 year; 18 – 29 months as 2 year; 48 – 71 months as 5 years.


Top 50 National APYs – Top 50 U.S. bank and thrift holding companies by deposits. CD Rates Average APYs are based on certificate of deposit accounts for $25,000. Copyright 2010 Informa Research Services, Inc as a part of their Interest Rate Review – Retail. Report dated May 10, 2011.

What is a bond fund?

“Bond funds” and “income funds” are terms used to describe a type of investment company (mutual fund, closed-end fund or unit investment trust (UIT)) that invests primarily in bonds or other types of debt securities. Depending on its investment objectives and policies, a bond fund may concentrate its investments in a particular type of bond or debt security—such as government bonds, municipal bonds, corporate bonds, convertible bonds, mortgage-backed securities, zero-coupon bonds—or a mixture of types. The securities that bond funds hold will vary in terms of risk, return, duration, volatility and other features.

Can I lose money investing in a bond fund?

Yes. A common misconception among some investors is that bonds and bond funds have little or no risk. Like any investment, bond funds are subject to a number of investment risks including credit risk, interest rate risk, and prepayment risk. A bond fund’s prospectus should disclose these and any other risks. Before investing in a bond fund, you should carefully read all of the fund’s available information, including its prospectus and most recent shareholder report.

What is credit risk?

Credit risk is the risk that the issuers of the bonds owned by a fund may default (fail to pay the debt that they owe on the bonds that they have issued). This risk may be minimal for funds that invest in U.S. Government bonds.

What is interest rate risk?

Interest rate risk is the risk that the market value of the bonds owned by a fund will fluctuate as interest rates go up and down. For example, when interest rates go up, the market value of bonds owned by a fund generally will go down. Nearly all bond funds are subject to this type of risk, but funds holding bonds with longer maturities are more subject to this risk than funds holding bonds with shorter maturities. Because of this type of risk, you can lose money in a bond fund, including those that invest only in insured bonds or U.S. Government bonds.

What is prepayment risk?

Prepayment risk is the risk that the issuers of the bonds owned by a fund will prepay them at a time when interest rates have declined. Because interest rates have declined, the fund may have to reinvest the proceeds in bonds with lower interest rates, which can reduce the fund’s return. (Not all bonds, however, can be prepaid.)

Will I receive tax advantages if I invest in a municipal bond fund?

Some bond funds invest in municipal bonds that pay interest which is exempt from federal income taxes. In addition, interest on the bonds of some states are exempt from taxation by that state. Not all of the income that you receive from a municipal bond fund, however, will necessarily be exempt from federal or state income tax. The fund’s prospectus will describe any of its tax-exempt features.

What is an ultra-short bond fund?

Ultra-short bond funds are mutual funds that generally invest in fixed income securities with extremely short maturities, or time periods in which they become due for payment. Like other bond funds, ultra-short bond funds may invest in a wide range of securities, including corporate debt, government securities, mortgage-backed securities and other asset-backed securities.

Some investors don’t realize that there are material differences between ultra-short bond funds and other investments with relatively low risks, such as money market funds and certificates of deposit. Specifically, ultra-short bond funds tend to have higher risks than money market funds and certificates of deposit (CDs).

To learn more about ultra-short bond funds, including some of the material differences between these funds and other investments, you should read Ultra-Short Bond Funds: Know Where You’re Parking Your Money.

Information courtesy of the SEC’s Office of Investor Education and Advocacy. The Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy.

Ultra-short bond funds are mutual funds that generally invest in fixed income securities with extremely short maturities, or time periods in which they become due for payment. Like other bond mutual funds, ultra-short bond funds may invest in a wide range of securities, including corporate debt, government securities, mortgage-backed securities, and other asset-backed securities.

Some investors don’t realize that there are material differences between ultra-short bond funds and other investments with relatively low risks, such as money market funds and certificates of deposit. Specifically, ultra-short bond funds tend to have higher risks than money market funds and certificates of deposit (CDs).

Money market funds can only invest in certain high-quality, short-term investments issued by U.S. government, U.S. corporations, and state and local governments. Ultra-short bond funds, like other bond mutual funds, are not subject to these requirements and typically pursue strategies aimed at producing higher yields by investing in securities with higher risks. In addition, the net asset value (NAV) of an ultra-short bond fund will fluctuate, while a money market fund tries to keep its NAV at a stable $1.00 per share. Money market funds are also subject to strict diversification and maturity standards that don’t apply to ultra-short bond funds.

Ultra-short bond funds are not guaranteed or insured by the FDIC or any other government agency. A CD, on the other hand, features federal deposit insurance up to $250,000. A CD, which promises a return of principal and a specified rate of interest, is a special type of deposit account with a bank or thrift institution that typically offers a higher rate of interest than a regular savings account.

If you are considering investing in an ultra-short bond fund, keep in mind that ultra-short bond funds can vary significantly in their risks and rewards. In fact, some ultra-short bond funds may lose money despite their investment objective of preserving capital. The level of risk associated with a particular ultra-short bond fund may depend on a variety of factors, including:

Credit Quality of the Fund’s Investments – It’s important to know the types of securities a fund invests in because ultra-short bond funds may experience losses due to credit downgrades or defaults of their portfolio securities. Credit risk is less of a factor for ultra-short bond funds that principally invest in government securities. By contrast, if you invest in an ultra-short bond fund that invests in bonds of companies with lower credit ratings, derivative securities, or private label mortgage-backed securities, you’ll generally be subject to a higher level of risk.

Maturity Dates of the Fund’s Investments – The maturity date of a security is the date that it becomes due for payment. An ultra-short bond fund that holds securities with longer average maturity dates will be riskier than a fund with shorter average maturity dates — assuming the funds are otherwise similar.

Sensitivity to Interest Rate Changes – Generally, when interest rates go up, the value of debt securities will go down. Because of this, you can lose money investing in any bond fund, including an ultra-short bond fund. In a high interest rate environment, certain ultra-short bond funds may be especially vulnerable to losses. Before you invest in any ultra-short bond fund, be sure to read about a fund’s “duration,” which measures how sensitive the fund’s portfolio may be to changes in interest rates.

As always, be skeptical of any investment that promises you a greater potential for return at no additional risk. Investors can learn more about an ultra-short bond fund by reading all of the fund’s available information, including its prospectus.

Investors should understand how mutual funds work, what factors to consider, and how they can avoid common problems, before they invest in an ultra-short bond fund or any mutual fund.

Information courtesy of the SEC’s Office of Investor Education and Advocacy. The Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy.