Save Money with Defined Asset Trusts


In 1994, more than 80 percent of actively managed funds failed to outperform major stock indices, such as the Standard & Poor's 500 Index of stocks.

So if you bought a mutual fund that mirrored the index, such as those offered by Vanguard, Fidelity, Dreyfus and other firms, you would have enjoyed better returns than most of the brightest fund managers on Wall Street.

Mutual funds that try to replicate the performance of stock indices (known as stock index funds) usually have low management fees because a computer-not MBAs-does the work. These funds are great ways to diversify risk and earn a great return.

But if you intend to invest in a fund that mirrors an index for over five years (as most long-term, stock investors should) consider buying a defined asset trust.

Defined asset trusts work just like stock mutual funds. They both buy large amounts of stocks. Both also define their objectives, such as attempting to mirror stock indices, creating a diversified portfolio of utility stocks, etc. The big difference is that defined asset funds buy stocks only once, whereas stock mutual funds experience turnover of up to 100 percent of their portfolio.

Defined asset trusts also don't go on forever as mutual funds do. When a defined asset trust expires, you are forced to put your money in another defined asset trust or other investment. But you can buy many defined asset trusts that don't expire for 10 or 20 years.

Full service brokers, including Dean Witter, Merrill Lynch, Smith Barney Prudential and PaineWebber sell defined asset trusts because it gives their clients a competitive alternative to stock index mutual funds sold by mutual fund companies.

Take the EIF S&P Mid Cap 400 trust they sell, which you can look up with all the rest of the defined asset trusts in Barron's. This defined asset trust essentially mirrors the basket of stocks in the S&P 400 index. It expires February 28, 2017.

The only charge brokers attach is a sales commission, which ranges from 2.25 percent for purchases under $25,000 to 1.5 percent for purchases over $75,000.

Compare that charge to the 0.4 percent annual management fee Dreyfus charges on its S&P 500 stock index fund.

If you buy a big quantity of the trust, you start saving money after year four.

Bottom line: if you're not willing to do the homework to invest in individual stocks, buying defined asset trusts makes sense for long-term investors.

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