Country Baskets, WEBS Customize Your World

If you’re looking to simplify your foreign investments, try weaving some WEBS into your portfolio. Or pick up a few country baskets.

World equity benchmark shares, as they’re formally known, are a new branch on the investment tree--an offshoot with certain advantages over foreign stocks, closed-end portfolios and mutual funds.

WEBS ([800] 810-WEBS) are single-country index portfolios that trade on the American Stock Exchange. They are not mutual funds but rather “investment companies,” a category that also includes unit trusts and closed-end funds. Country baskets ([888]-8CB-INFO) work in similar fashion but trade on the New York Stock Exchange.

Each WEBS or country basket holds the dominant stocks in a particular market index to replicate returns in that nation. Currently, you can choose among 17 WEBS portfolios: 10 in Europe, four in Asia and one each in Canada, Mexico and Australia. There are eight foreign country baskets: four in Europe, two in Asia and one each in Australia and South Africa.

All WEBS buy the stocks to replicate the Morgan Stanley international index for that country; the country baskets buy stocks in the indexes from the Financial Times and Standard & Poor’s.

As index portfolios, these products represent well-diversified proxies for the target country. If you’re bullish on Germany’s economy, for example, you could buy the single WEBS German index series rather than numerous individual German stocks.

Like mutual funds, WEBS and country baskets do charge management and other fees you don’t face with individual stocks, but this drawback can be more than offset by savings in brokerage fees.

As with individual stocks, you would pay a brokerage commission to buy or sell these exchange-traded vehicles. But there are no mutual fund loads or sales charges.

In some respects, WEBS and country baskets also compare favorably with closed-end funds, many of which track specific foreign markets. That’s because the new products do not trade at big discounts or premiums compared with their “net asset value,” or NAV--the true worth of the underlying stocks owned. Closed-end funds often do swing to large premiums or discounts, based on prevailing investor sentiment.

“Closed-end funds have a higher level of complexity, with the NAV and price being different,” says Peter von Raits, president of Closed-End Fund Advisors, a money management firm in Santa Barbara. This feature makes them hard for some people to comprehend, he says.

Of course, you can make money by purchasing a closed-end fund at a discount, provided the markdown eventually shrinks or disappears.

“The chance to buy at a discount is one of the great advantages of [closed-end] funds,” writes Gregg Wolper, editor of Morningstar Closed-End Funds in Chicago.

But the premium/discount sword cuts both ways because discounts sometimes widen. And investors who buy closed-end funds at a premium are essentially buying shares above their true value. In such cases, buying a WEBS or country basket could be the wiser move, Von Raits says.

Compared with regular mutual funds, most of which don’t focus on a single foreign market, WEBS and baskets provide more opportunity to pursue a finely tuned investment strategy.

“You really can tilt your portfolio around,” says Cory Laing, an analyst in New York for Morgan Stanley, one of five large financial companies that teamed up to create WEBS.

Country baskets are offered by an arm of Deutsche Bank in New York.

The portfolios also stack up well against many international mutual funds in terms of costs. On average, international funds charge shareholders 1.58% a year, or $15.80 for each $1,000 investment. These outlays cover a fund’s management, marketing efforts, shareholder services and more. WEBS and country baskets provide the same services for about 0.85% on average.

But you can find some mutual funds that are more penny-pinching. For example, the new Vanguard Total International Portfolio ([800] 662-7447) offers unrivaled diversification--stakes in 1,500 companies from 31 nations--for just 0.38% a year.

As with mutual funds, any capital gains earned by a WEBS or country basket portfolio from the sale of stock holdings must be passed through to shareholders each year. But because these are index products, the amount of trading--and thus the amount of taxable gains generated each year--is likely to be small.

Compared with mutual funds, one key difference is that WEBS and baskets, as exchange-traded vehicles, can be bought and sold at various prices throughout the day.

And they allow investors with a negative view of a particular foreign market to bet against, or “short,” the appropriate shares. (In a short trade, investors sell shares borrowed from a brokerage in the hopes that they can buy them later at a lower price, closing out their position at a profit. It’s the reverse of the normal procedure of buying first and selling later, hoping the share price rises.)

Perhaps the main reason to consider WEBS or country baskets relates to customizing your foreign holdings more precisely than with most mutual funds. But if you don’t know which markets to go after, it’s best to stick with a broadly based international fund.