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WEBS - A Flexible Way to Span the Globe
By Rahul Seksaria
1999

Index investors have had limited options in foreign investing, but in the past two years WEBS (World Equity Benchmark Shares) have changed this situation dramatically. WEBS are country-specific indexes (17 so far) that trade like stocks.

Much like SPDRs (Standard & Poor's Depository Receipts), WEBS offer a simple and cost-effective way to put your money to work through international index investing. For the investor seeking flexibility they:

are traded just like any stock but track an index
are bought and sold in US dollars and pay dividends in USD
can be margined
do not require a large investment ($6-$28 per share as of 06/07/99)
have competitive operating expense ratios (around 1%)
can be sold short, even on a downtick
are tax-efficient because of low portfolio turnover and reduced capital gains

Investors should keep in mind that WEBS are subject to currency risk and not hedged against the possibility of the foreign currency falling against the dollar. In addition, there is a risk of foreign government blocking the repatriation of funds such as occurred in Malaysia over the past 9 months (see Malaysia).

How WEBS are created and operated

Technically, WEBS are 17 country-specific series of securities that are listed and trade on the American Stock Exchange (AMEX). Each WEBS Index Series represents an investment in a portfolio of foreign shares that tracks the performance of a specific Morgan Stanley Capital International (MSCI) country index.

WEBS are offered for Australia, Austria, Belgium, Canada, France, Germany, Hong Kong, Italy, Japan, Malaysia, Mexico, Netherlands, Singapore, Spain, Sweden, Switzerland, and UK. In Malaysia, Mexico, and Singapore, certain stocks have restrictions on foreign ownership. MSCI created "free" indices in those countries which only include stocks in which foreigners may invest.

WEBS are managed by Barclays Global Fund Advisors, one of the largest quantitative equity index managers in the world. Barclays uses sophisticated optimization models to construct portfolios of securities similar to those of the relevant MSCI index. They periodically rebalance each WEBS portfolio in order to closely track the performance of the benchmark index.

Net Asset Value (NAV) per share of each WEBS Index Series is computed by dividing the value of the net assets of such WEBS Index Series by the total number of WEBS outstanding, rounded to the nearest cent. Expenses and fees are accrued daily by the Fund and are taken into account for the purposes of computing the NAV. Portfolio values for determining NAV of each WEBS Index Series are determined using the latest quotes of the component foreign stocks and the exchange rate of the WEBS country. WEBS trade on the secondary market at a price very close to their NAV. There can be slight deviation from the NAV as the shares are not freely redeemable. The shares can only be redeemed in Creation Units (the size of the lot in which they are issued which varies across each of the country WEBS). Most investors do not hold so many shares and the WEBS can trade at a discount (lower than NAV) if there is selling pressure from investors. They might also trade at a premium (above NAV) in the face of excess demand. Substantial variances from NAV cannot be sustained due to the continuous Creation/Redemption process (shares being issued and redeemed at the NAV).

The graph below shows the average annual return you would have obtained each year from 1988 - 1998 by investing in a fund (WEBS were introduced in 1996) that tracked the specific MSCI country index. It is followed by graphs of individual country indexes showing yearly returns for the same time period.