By Gail Liberman
One question likely to be haunting you this cocktail season — besides your golf or tennis game — is how to make a dollar in the stock or bond markets.
Now you can take your cue from some well-heeled neighbors. The Direxion Investments‘ new iBillionaire Index exchange traded fund, launched in August, is designed to mimic strategies of up to 10 of the Forbes 400 richest billionaire investors.
The 10 billionaires, not all named, are selected based on lower stock turnover, assets under management and their three-year stock performance. They’re taken from an initial list, composed of 20 billionaires in the Forbes 400, who made their money via investing; they’ve also filed Securities and Exchange Commission Form 13F. That form publicly lists securities held by institutional investment managers.
You can view the investments of 20 billionaires on the preliminary list at ibillionaire.me/ibillionaireindex. Click on «Explore Billionaires» and then click on their photos.
The iBillionaire exchange-traded fund invests in a basket of 30 leading U.S. stocks in which the 10 selected billionaires invested the most. Much like a stock, you buy an exchange-traded fund from a broker, and it’s traded throughout the day. But stocks, even in exchange-traded funds, generally are riskier than bonds and cash — as many learned the hard way in 2008.
With that in mind, the iBillionaire Index exchange-traded fund’s current largest stock holdings include: Apple; Micron Technology; Priceline.Com; 21st Century Fox; Dollar General Corp.; Actavis; AIG; Ebay; Dow Chemical Co; and MasterCard. The fund is rebalanced quarterly, just after those 13F forms are filed.
Billionaires tend to hold their stocks over the long term, said Raul Moreno, the fund’s founder. Based on filings, more than 90 percent of their investments are in stocks. Only billionaire George Soros is betting slightly against stocks these days. Warren Buffett recently told CNBC-TV that all Berkshire Hathaway company pension funds, except for a few utilities, were 100 percent invested in stocks.
The billionaires, Moreno noted, often sit on the boards of companies they own.
What about bonds and other income investments? Unfortunately, there’s no sure thing. Here’s what you must deal with:
U.S. Treasuries, once considered the world’s most solid investment, has seen yields swinging into negative territory. Europe wasn’t faring any better. Bond prices move in the opposite direction of interest rates. If interest rates rise, bond price fall. So you could lose money if you need to sell.
Experts fear worldwide tensions and an aging population could slow economic growth.
On the plus side, Morningstar Inc. of Chicago sees the economy benefiting from housing activity, export growth, higher wages, low interest rates and energy-dependent industries.
Kevin Campbell, family investment officer at GenSpring Family Offices in Jupiter, notes one special bond opportunity: High-yield municipal bonds.
Beware that these are very risky. So Campbell suggests an exchange-traded fund or mutual fund for diversification, and holding a very small amount. Only about 20 percent of your fixed income or bond allocation — depending upon your particular situation — might make sense.
Not only are high-yield municipal bonds exempt from federal income taxes, but they were yielding more than high-yield corporate bonds, which is highly unusual. These triple B-rated-or-lower municipal bonds can have a tax equivalent yield of some 10 percent for someone in the 39.6 percent federal income tax bracket, paying the new 3.8 percent Medicare surtax on investment income, Campbell said.
High-yield municipal bonds are lower risk than high-yield corporate bonds, with default rates of only 2.6 percent from 1970-2012, compared with 13.9 percent for high-yield corporate bonds. And even when munis default, they recover an average 64 percent of their assets compared with 48 percent for corporate bonds. Also, higher property valuations and a rebounding economy are padding municipal coffers, making defaults less likely.