Things change fast when you're investing in Internet time.
One day, pure Internet plays like
are the wave of the future.
The next day e-commerce -- companies that use the Net to make money but don't depend on it for their lifeblood -- is the latest thing.
John Nuveen & Co.
is targeting this emerging sector with one of the hottest new investment vehicles around: a unit investment trust.
Nuveen e-Commerce Sector Portfolio
is a UIT that invests in 35 companies geared to make money on, through, or because of the Internet, as well as in the pure Internet plays.
"When people think of e-commerce, they usually think of companies that deal directly with the public, like Amazon.com or
," says William Adams, managing director of Nuveen's defined portfolios. "While those companies are important contributors to the growth of e-commerce, it has been estimated that 70% of e-commerce is business to business. This is a broader sector than people perceive." For more on this emerging sector, see our recent
UITs invest in a set group of stocks for a fixed period of time -- say five years. They are not mutual funds, but because the stocks they hold don't change, they act a lot like index funds -- except with an expiration date. Investors can cash out before maturation, but there is a set offering period to buy in.
In case of catastrophe, the Nuveen UIT can remove stocks from its portfolio, but only under extraordinary circumstances, such as a company declaring bankruptcy, says Adams.
UITs have surged in popularity recently because of potential tax advantages over mutual funds and their ability to track specific stocks. Nuveen offers 12 sector UITs. (For more on UITs, see a recent
Fund Forum on Nasdaq 100 UITs and another
story on Internet UITs.)
The combination of UITs' popularity and the frenzy over anything remotely related to the Internet has gotten Nuveen's e-Commerce portfolio off to a fast start. On Friday alone, the first day the portfolio was open to the public, Nuveen was flooded with $31 million in cash from investors wanting to buy into the trust.
On Tuesday, Internet stocks were hammered in a late-day selloff, illustrating the volatility of the sector. Yahoo! fell 35 13/16 to 287 3/16 and Amazon.com fell 26 13/16 to 113. Both stocks are in the Nuveen UIT. Here is a complete list of the stocks in the UIT:
While UITs are one of the hottest investments around, there are disadvantages to these vehicles, especially when they're added to the volatile mix of e-commerce stocks. Because of the sector's chaotic dynamics, the static composition of UITs could play against them. And with Nuveen's e-Commerce Portfolio designed for a five-year lifespan, the investment landscape could be dramatically different when it reaches maturity.
Investing in a fixed set of e-commerce stocks is "a scary thing to do in this market because things do change quickly," says Gary Ambrose, a planner with
Personal Capital Management
in New York. "These companies could disappear right off the face of the earth."
Online services, the predecessors of Internet service providers, are a good example of how fast things can change.
"If you think back to before the Internet really took off and look at the (online services), there were several:
," says Kian Ghazi, a senior analyst with
Midtown Research Group
in New York. "And really, there was only one that survived, and that was AOL."
Actually, Prodigy, once the largest online service, still exists, though it is dwarfed by America Online. CompuServe is now a unit of AOL and GEnie is owned by Internet service provider
Adams says one of the portfolio's advantages is that it was picked by professionals who are looking to pick tomorrow's emerging leaders. But while professionals may have extra insight into the market, they're still human. "Investors should not lull themselves into thinking that since there is professional management in this area that it is any less risky than if they did it themselves," says Ambrose.
On the other hand, UITs have several advantages over mutual funds. They don't make annual capital gains distributions, which can complicate tax planning. And they typically have low expenses. The Nuveen e-Commerce Portfolio has an expense ratio of 0.24%, compared with 1.5% for the average mutual fund. But because they're typically available only through brokers, you usually have to pay a sales charge to buy in. The e-Commerce Portfolio, for example, has a 4.5% sales charge within the first year of ownership on a $1,000 minimum investment. (The minimum is lower for IRAs.)
Adams shies away from comparisons between his firm's UITs and mutual funds, and instead says they are good vehicles for diversifying away from an investment in a single stock in a particular sector.
"We don't go out there and try to convince people that they should invest in this instead of a mutual fund," Adams says. "This is not a substitute for a diversified portfolio. This is a substitute for someone making an individual stock purchase in this sector to begin with."
Ambrose says UITs are useful for individuals who are just starting to invest money and "have no clue where to begin."
Still, Ghazi notes that diversification is a relative term when investing in a specific sector, especially in one with the volatility of the Internet.
"The Internet stocks are highly correlated," Ghazi says. "If the Internet valuations do crack, they're all going down. It's just a matter of magnitude of which ones go down less rather than more."