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Originally published April 27, 2008 at 12:00 AM | Page modified April 27, 2008 at 12:33 AM

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Bear Stearns Current Yield (YYY)

For years, the mutual-fund industry has talked about creating actively managed exchange-traded funds, and I always figured that the very...

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For years, the mutual-fund industry has talked about creating actively managed exchange-traded funds, and I always figured that the very first one — heralding the new genre of ETF — would be a Stupid Investment of the Week.

I wasn't wrong.

Last month, marked the debut of Bear Stearns Current Yield, and while there is no truth that its ticker symbol "YYY" is shorthand for investors wondering "Why, why, why would I buy this?" there's no denying that the fund qualifies as Stupid Investment of the Week.

Stupid Investment of the Week showcases the conditions and character flaws that make a security less than ideal for the average investor, and is written in the hope that highlighting the perils of one situation will make similar danger zones easier to recognize elsewhere.

In the case of Bear Stearns Current Yield, there are not a lot of those "elsewheres" to look at yet, as the fund debuted March 25. While there have been four actively managed ETFs unveiled by PowerShares since then, the big boom in active ETFs is still on the horizon. Once it gets here, however, the YYY still won't look any better.

First, it's important to note that the issue here is not with Bear Stearns, the troubled financial-services firm. Shareholder money in the fund is safe and segregated, so it is not affected by the company's troubles.

The problems with Bear Stearns Current Yield fund involve what the fund itself can deliver, which probably won't live up to anyone's expectations for actively managed ETFs.

ETFs are built like index mutual funds but traded moment-by-moment like stocks. They tend to be low-cost, tax-efficient baskets of securities, designed to track an index or specific market strategy.

Used correctly, they can be a great alternative to traditional mutual funds. That's partly why so many industry watchers have been clamoring for actively managed ETFs, where the fund is run based on the intuition and decisions of an expert, rather than a passive, follow-the-benchmark strategy.

A traditional actively managed mutual-fund not only would have greater costs, but can only be bought or sold at the day's closing price.

For several years, a number of concerns have sidetracked the development of actively managed ETFs, making it so that regulators were reluctant to green-light the filings of many investment firms that lined up to launch active products.

As such, the introduction of the YYY was a big deal, a harbinger of a change that some observers believe will make the traditional mutual-fund obsolete.

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Lost amid the excitement of the first active ETFs is the constricted nature of the Bear Stearns fund's mandate. The very asset class involved diminishes the ability of a manager to deliver superior returns, meaning that shareholders aren't likely to get what they expect from the fund.

Bear Stearns Current Yield buys short-term debt to generate income. That means it purchases government securities, corporate debt, mortgage-backed and asset-backed securities, municipal bonds, foreign debt obligations, and the alike. In short, it might best be characterized as an "enhanced money market fund."

The trouble is, there's not a lot of value that an active manager can add to short-term bond funds and money market funds.

Bear Stearns Current Yield is charging 0.35% in expenses, thanks to a reimbursement that management is making to the fund. That's competitive — better than the 0.47% charged by the average money market fund, according to Crane Data — but not great in the realm of bond funds.

Moreover, because ETF shares trade like a stock, there's a brokerage commission for every buy and sell. It can add significant layer of costs to ordinary expenses in some circumstances.

Short-duration bond funds tend to be "parking places," investments built for storing cash for a short time. Used that way, the commission on the quick round-trip can be cruel to the overall cost structure.

"If you trade in this fund, you fritter away any expense advantage that ETFs might normally have," says Jeff Ptak, director of ETF research at Morningstar in Chicago.

And while supporters of active management would like to believe that the guy in charge can deliver something big, the truth is that none of the managers for active ETFs to date — including the YYY, the four PowerShares funds and dozens in registration — is some legendary guru.

"I don't think you can look at the fund and have any reason to expect it to have superior performance — and probably worse once your transaction costs are put in — than anything else out there," says Gregg Brewer, executive director of research at Value Line. "You'd just be buying this because it's the new thing."

Chuck Jaffe is senior columnist for MarketWatch. He does not own or hold short positions in any securities covered by Stupid Investment of the Week. If you have a suggestion for Chuck Jaffe's Stupid Investment of the Week or a comment about this week's column, you can reach him at jaffe@marketwatch.com or Box 70, Cohasset, MA 02025-0070.

2008, MarketWatch

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