One solution could be a new type of investment called Total Return Asset Contracts, which creator Merrill Lynch dubbed TRAKRS. Introduced last year, these are futures contracts that are linked to prices of commodities, stocks, and currencies, but with less risk than traditional derivatives. In addition, they have greater trading flexibility, more tax efficiency, and lower costs than mutual funds.
The problem with futures is the leverage. Investors post 5% to 15% of the total value of the contract in a margin account, and they stand to lose more than they put in if they bet the wrong way. Such is not the case with TRAKRS -- because investors must pay the full amount up front, currently ranging between $25 and $50 per contract. "In many respects, TRAKRS trade and behave exactly like an exchange-traded fund [ETF] or stock," says Merrill Lynch's Mitch Cox, who helped develop the TRAKRS. "If the TRAKRS' contract goes up a dollar, your investment goes up a dollar, and vice-versa."
The Commodity TRAKRS mirrors the Dow Jones (DJ
) Commodity Index Total Return, a composite of 20 commodities, from aluminum to zinc. There are others: Euro Currency TRAKRS, a bet on the relationship between the dollar and the euro; a Long-Short Technology TRAKRS, which acts like a tech-stock hedge fund; LMC TRAKRS follow small-cap and mid-cap stocks; and Select 50 TRAKRS track large-cap stocks.
The equity-oriented TRAKRS are intriguing. The long-short tech fund has many of the attributes of a hedge fund, which usually charges 1% of assets per year plus 20% of the profits. There are no trading costs, since TRAKRS don't buy and sell stocks. There's no management fee, because there's no underlying portfolio. And since TRAKRS don't distribute gains, an investor will only realize a capital gain when the investment is sold or when the contract, which has a three-year maturity, expires. As long as TRAKRS are held longer than six months, the top tax rate is 15%.A SHORT TRACK RECORD
The record on these products is not long -- but so far, so good. The long-short TRAKRS has gained 59.8% since its August, 2002, inception, compared with 46.5% for the NASDAQ 100 index. LMC TRAKRS has gained 25.9% since its launch in January.
One problem with TRAKRS is that they're hard to track. Prices are available at www.trakrs.com or the Chicago Mercantile Exchange Web site, www.cme.com. Those prices may be higher than the TRAKRS' underlying index. For index prices, you can ask a broker -- or log on to them at Yahoo! Finance. The premium -- recently about 3% -- fluctuates, depending on demand for the particular TRAKRS. Think of it as paying a 3% sales charge without the ongoing expenses of a mutual fund.
The other problem is that these contracts are hard to purchase from brokers other than Merrill. "It takes time for a new product to gain broad appeal," says Merrill's Cox. "Exchange-traded funds started in the early 1990s, but didn't get popular until the late 1990s." TRAKRS' success ultimately will depend on how well they perform. Maybe a bull market in commodities will help put them on the map. By Lewis Braham