Global Warning

February 09, 2007

There are many ways to Dublin - but not all are cheap.

If you happen to find yourself in Augusta, Maine with a hankering to visit a city about 2700 miles-or-so away (as the crow flies), then you have  a couple of alternatives.

One alternative (the domestic one) would be to visit Los Angeles, California.  This trip, on US Airways with two plane changes, will set you back about $506, for a cost of $0.19/mile.

Another alternative (the foreign one) would be to visit Dublin, Ireland.  This trip, on Aer Lingus, would also involve two plane changes, but would cost somewhat more - $688.

On a per-mile basis, this international flight would cost about $0.24/mile - about 25 percent more than the domestic flight.

Something similar is happening in the global indexing industry - foreign "trips" cost more than domestic "trips". Special "trips" - which include both domestic and foreign (or otherwise exotic-sounding locations) -  cost even more. But if you take the time to plan your visit - excuse me, investments - as carefully as you might plan a vacation to either LA or Dublin,  then you should be able to lower your investment costs.

Examples of this can be found in the recent flood of new index funds and ETFs.

I'll Tell You What I Want, What I  Really Really Want

Consider, for example, the Northern Global Real Estate Index Fund (NGREX). According to Northern Trust's Web site, this fund - benchmarked to the FTSE EPRA/NAREIT Global Real Estate Index -  has 42 percent of its assets in the U.S., with the balance overseas. The expense ratio of the fund is 75 bps.

If one wanted to duplicate the 42 percent/ 58 percent domestic/foreign asset mix of NGREX, there are a variety of ways to get similar exposure while reducing your ongoing expense ratio.

One of the simplest would be (as summarized in Figure 1) to combine the iShares Cohen & Steers Realty Majors Index Fund (NYSE: ICF) with the recently introduced streetTracks DJ Wilshire International Real Estate ETF (AMEX: RWX).

ICF is a "U.S.-only" fund with a 35 bp expense ratio.  RWX's index specifically excludes U.S. holdings and has a 60 bp ER.  If we "slap" ICF and RWX together with a 42 percent/58 percent mix - duplicating the broad geographic mix of NGREX - we end up with a "blend" that has a 50 bp expense ratio.  In contrast, the 75 bp expense ratio of NGREX is 25 bps, or 50 percent higher.

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