Question: I hope you don’t consider this to be a dumb question. When the SPI shows an increase for the following day, the value of the index is considerably less than the closing value of the index. Shouldn’t the value figure be higher for the SPI?
Answer (By Paul Rickard): There is no such thing as a dumb question.
By SPI, I think you are referring to the futures contract. This is a cash settled instrument that closes out according to the value of the S&P/ASX 200 Index on the third Thursday of the settlement month, usually on a calendar quarter basis.
At the moment, the current ‘spot’ contract is the March 2014 contract, which will cease trading on Thursday 20 March. Effectively, this will settle based on the value of the S&P/ASX 200 Index on that day.
As it is a futures contract, it won’t be the same as the underlying physical (ASX) market. There will of course be a close correlation, however it will trade at a premium or discount. This discount or premium reflects sentiment (if the market is bearish, more likely to be at a discount), as well as the cost of carry (interest rates vs dividends), and other factors.
The SPI futures contract trades almost on a 24 hour basis (has a ‘night’ session that at this time of the year, goes until 8.00am), so if you hear in the morning that the SPI was down 30 points, all things being equal, our ASX market should open down around 30 points.
Question 2: I would like to invest in US Treasury Bonds – how do I go about it? I currently use Commsec but they do not have capability. Can you recommend someone? How do you feel about this as an investment to diversify as most of our shareholding is in Australian stock, either directly or through BT Growth Fund and Colonial First States’ Imputation Fund.
Answer 2 (By Paul Rickard): Thanks for the question, although to be honest, I have never been asked before about investing in US Treasury Bonds.
I can’t ascertain a ready way for a private investor to do it from Australia. You can of course, invest indirectly through global fixed interest funds offered by managers such as Blackrock, Aberdeen and others. On the world bond index, the US accounts for around 40% – so a global fund will typically have an allocation of 40% to 50% to the US. If it is a government bond fund only, a higher proportion of that weighting will be invested in US Treasury Bonds – if it is broad fixed interest, then a lower component will be invested.
I am struggling to understand why you would want to invest directly in US Treasury Bonds, unless you are really concerned about the Aussie dollar and want premium safety. The Australian Government Bond market (which you can invest in) has some level of correlation with US Government Bonds, and you could synthetically get currency exposure through an ETF (for example, Beta Shares US Dollar – ASX Code USD).
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report:
- Charlie Aitken: The jewel in the Crown [1]
- Ron Bewley: How to build a portfolio [2]
- Damian Crowley: My SMSF – alternatives add spice [3]
- Staff Reporter: Buy, Sell, Hold – what the brokers say [4]
- Tony Negline: Why you need an electronic servicing address [5]
- Brittany Ruppert: Do you know what a Fibonacci retracement is? [6]
PLUS don’t forget to follow the Switzer Super Report on Twitter. [7]