Beating the Fed’s Low-yield Racket

By Kevin Brekke, Managing Editor, World Money Analyst

While in the midst of a recent morning routine of protein nourishment
with frequent palate cleansings of espresso, I was swept into a
vocabulary adventure. As I suspect many of you reading this also
do, I was making the rounds of my favorite blogs. Clicking my way
onto James Howard Kunstler’s always-colorful weekly posting, my
eyes, passing over the prose, came to a screeching halt at the word
“malaprop.”

A quick visit to Wikipedia informs that a malapropism is the misuse
of similar sounding words – often to a humorous end. “What are you
incinerating (insinuating)?” and “He’s a vast suppository (repository)
of knowledge” are two fine examples.

To those I would add “The Fed’s continued accommodative (accumulative)
policy,” because there is little about this policy that accommodates
those struggling to earn a fair return on their savings. And this
malapropism leaves millions as the butt of a very cruel joke.

ZIRP or RICO?

Today’s ultra-low interest rates have been disconnected from the
free market discovery process, and are instead hostage to a syndicate
of central banks that set interest rates via edict. ZIRP (zero interest
rate policy) is an accumulative policy whereby the banks benefit
from borrowing short (at next to zero interest) and lending long
(at a nice spread) – and accumulate the difference. And the difference
is stolen from the pockets of the prudent class of savers.

The interest rate scheme looks suspiciously like a racket. Under
the RICO Act (Racketeer Influenced and Corrupt Organizations), a
racket is understood as a business (central banks are private, for-profit
businesses) or syndicate that is engaged in the sale of a solution
to a problem that the institution itself creates, with the intent
to effect continual patronage.

The Fed is engaged in a ZIRP solution to the fall-out from the
2008 financial crisis, itself the product of the US housing finance
bubble that the Fed conspired to create and fully orchestrated its
ascent. We are all “buyers” of the solution and are paying through
forfeiture of a market-driven yield on our wealth.

And while we’re at it, let’s throw in conspiracy. The unfolding
Libor scandal has stripped naked the illusion of a fair mechanism
that determines the base interest rate off of which trillions of
dollars of loans are priced. The banks that set the daily Libor
“fixing” were themselves making bets linked to the Libor rate and
then fraudulently manipulating its direction to their benefit.

Continual patronage? Central banks are monopoly institutions. ‘Nuff
said.

Yield Pursuit

As troubling as the above is, it is beyond our control. Low rates
will be with us through at least 2014 per the latest Fed announcement
released last week regarding its monetary accumulative policy.

As investors, what remains in our control is the pursuit of higher
yields offered by many of today’s securities that pay a dividend.
Within this segment of stocks is an often overlooked subset: the
ADRs
of international companies that list on US exchanges.

Although it is advisable to buy the shares of a foreign stock on
its home exchange, many investors are uncomfortable with the idea.
For self-directed investors in particular, buying shares on an exchange
outside of North America may not be offered by your current discount
broker. And if foreign stock trades are available, the service can
come with exorbitant fees and commissions.

There are many international companies with solid businesses and
steady cash flow that sell at good valuations and also offer decent
yields. For the investor seeking easy access to international markets
and stocks that offer CD-busting yields, don’t forget to consider
the world of ADRs.

Pass-Through Fees

The hunt for yield is more accurately phrased as the hunt for after-tax
yield, or more accurately still, the yield after taxes and fees.
That is especially true for an ADR.

In 2009, the Depository Trust Company (DTC) gained SEC approval
to begin collecting custody fees on behalf of the agent banks that
provide the custodial services on behalf of the ADR. The DTC collects
the fees from the brokerages that hold the ADRs for their clients.
For example, if you purchase and hold an ADR with Schwab, Schwab
will assess the fee against your account and pass the fee onto the
DTC. This is known in the industry as a pass-through fee.

Prior to 2009, the fee was deducted from the dividend paid by the
ADR. However, not all ADRs pay a dividend, and hence the 2009 change.

If you hold a position in a dividend-paying ADR, the fee is deducted
from the payout. If the ADR does not pay a dividend, the fee is
shown on your brokerage statement on the date it is assessed.

The pass-through fee will generally range from 1¢ to 3¢
per share, although the amounts will differ by ADR. The prospectus
for the ADR will show the fees. A prospectus can be obtained through
the SEC’s EDGAR
Company Search
tool.

ADRs are a convenient portal to international equities and the
yields that many will offer. Although we prefer to purchase foreign
stocks on their home exchange, US-listed ADRs are an acceptable
compromise. And when you compare yields between select securities,
remember to include the pass-through fees in the calculation.

[Whether
you choose to invest on the home market or through an ADR, devoting
a percentage of your portfolio to high-quality international investments
is a wise idea. World
Money Analyst
helps by delivering a selection of the
most exciting, higher-yield opportunities out there every month.
Click
here to learn more and take your no-obligation, risk-free test drive.]

More on this topic (What's this?)
All eyes on Bernanke as recession looms
What Will Bernanke Do?
Read more on Federal Reserve at Wikinvest

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