Ask Kim: How to Compare Funds, ETFs
Kimberly Lankford explains how to compare the performance of similar mutual funds and ETFs, whether you can get your Medicare Part B premiums reduced, and more.
How do I compare the real performance of an exchange-traded fund and a mutual fund with similar objectives and similar results over the past five years? I currently own both iShares S&P Latin America 40 Index, an ETF, and T. Rowe Price Latin America, a mutual fund. Which is better? -- Mark Stuart, Valparaiso, Ind.
The performance question is relatively easy to answer. Not surprisingly, given the funds' narrow focus, their results track one another closely. Over the past five years through December 4, Price Latin America (symbol PRLAX) gained an annualized 29.7%, according to Morningstar, while iShares Latin America (ILF) returned 29.0% on its shares. For 2009 through December 4, the Price fund zoomed 114.1%, while the iShares ETF jumped a mere 94.6%. Morningstar's figures do not take into account brokerage commissions, which can lower your actual return.
But embedded in your second question are two fundamental issues that every fund investor needs to address: Do you prefer indexing or active management? And do you favor traditional funds or ETFs?
Like most ETFs, iShares Latin America is an index fund. It tracks an index made up of 40 major companies from Brazil, Mexico, Argentina and Chile. In early December, the fund's ten biggest holdings -- which include such relatively well-known names as Brazil's Vale (VALE) and Petroleo Brasileiro (PBR), as well as Walmart de Mexico (WMMVY.PK) -- accounted for 69% of its assets. The Price fund, by contrast, is actively managed (the current captain, Jose Costa Buck, has had the job for about a year). As of September 30, 2009, it held 48 stocks, many of which are also in the ETF, and its ten biggest holdings accounted for 59% of assets.
In terms of how ETFs and funds are structured, they both have pluses and minuses. With the Price fund, you get a list of holdings only once a quarter, and you can buy or sell only at the 4 p.m. eastern time closing price. The price is always the fund's net asset value per share. And, of course, the Price fund's success will stem, at least in part, from the skill of its manager.
With your ETF, on the other hand, you can buy and sell throughout the day and get a list of holdings updated daily at iShares.com. The share price may diverge from the value of the fund's assets, which can be a positive or a negative depending on whether the ETF trades at a discount to the value of its assets or at a premium, and whether you're buying or selling shares. But the biggest advantage of ETFs over mutual funds is that their annual fees tend to be much lower. Your ETF's annual expense ratio is 0.50%, while the fund's is 1.22%. Over the past five years, the Price fund was able to overcome its fee disadvantage. But there's no telling whether it will continue to do so in the future.
Pay Less for Medicare Part B
My wife and I pay a high-income surcharge for our Medicare Part B premiums based on our income more than a year ago. But we've since retired, and our combined incomes are now less than $30,000. Can we get these premiums reduced? -- G.T., via e-mail
Yes. The surcharge you're paying is based on your last tax return on record. Like other recipients whose adjusted gross income was more than $170,000 on a joint return in 2008 (or more than $85,000 if single), you and your spouse are paying nearly $60 over the standard premium per month for Medicare Part B.
But you can get your premium reduced if your income has dropped because of a "life-changing event." Such events include marriage, divorce, job loss or reduced work hours (including retirement), loss of income from income-producing property or cuts in pension benefits. Because your joint income is now $30,000, you should each end up paying the standard $96.40 per month. Fill out Medicare Part B Income-Related Premium -- Life Changing Event. You'll need to estimate your income for the year and provide evidence of the change.
Life After COBRA
The government has been paying 65% of my COBRA health insurance premiums since I lost my job, but that subsidy will expire soon, and my premiums will jump to more than $1,300 per month. Is there anything I can do? -- Bill Hanley, Appleton, Wis.
A lot of people will be experiencing the same problem in the next few months. The stimulus bill provided much-needed help for millions of laid-off workers -- people who lost their jobs between September 1, 2008, and December 31, 2009, could receive a 65% subsidy from the government to help cover their health-insurance premiums for up to nine months. The law was passed in February 2009, so the nine months expired in December for the first wave of people who signed up, and more people will lose the subsidy every month. You can keep health insurance through COBRA for up to 18 months after you lose your job, but your premiums could more than double.
Several bills in Congress in early December proposed extending the COBRA subsidy, but they're more likely to expand eligibility to people who lose their jobs after December 31, 2009, than they are to stretch the subsidy beyond nine months, says Mike Langan, of Towers Perrin, an employee-benefits consulting firm. When the COBRA subsidy expires, you may be able to find a better deal on your own, especially if you're healthy. Buying a high-deductible policy can lower the premium and make you eligible to contribute to a health savings account, which gives you tax-free money for medical costs.
You may still qualify for an individual policy even if you have some medical issues, but it's essential to shop around because each insurer has different rules. Check eHealthInsurance.com, or find an agent through the National Association of Health Underwriters. If you can't get an individual policy, COBRA may be your best bet.
After COBRA expires, most states will let you purchase a continuation policy or join the state's high-risk pool if you can't get coverage on your own, as long as you haven't gone more than 63 days without coverage.
Income for Landlords
I will soon be transferred to a new city for my job. Since we bought our house, housing prices have dropped so much that we can't afford to sell it. Our only real option is to rent it out and wait for the market to recover. What do I need to know about insurance and taxes? -- Jonathan Morel, Great Mills, Md.
First on your to-do list: Get rental-home insurance. It covers the building and provides liability protection but doesn't cover possessions, so it tends to cost about 20% less than a regular homeowners insurance policy, says June Walbert of insurer USAA. She also recommends including a section in the lease requiring your tenants to buy renters insurance, which will cover their liability and belongings.
When you file your tax return, you'll generally report rental income and expenses on Schedule E. You'll be able to deduct your mortgage interest on the rental property, utilities, insurance premiums, real estate taxes, advertising costs to rent the house, rental management fees, travel to and from the property, and legal and accounting costs.
And you can deduct depreciation -- the value of the building (but not the land) divided by 27.5 -- and the cost of repairs. You can't deduct home improvements that add value to the property, but you can eventually use the cost of those improvements to lower your capital-gains tax bill when you sell the house. (See our article Paper Records: What to Toss, What to Keep.)
Keep a close eye on the calendar if you've rented the house for nearly three years, recommends Mark Luscombe, of CCH Tax and Accounting. To qualify for up to $500,000 in profit tax-free when you sell a home, you generally must have lived in it for two of the preceding five years. For more details, see IRS Publication 527: Residential Rental Property, at www.irs.gov.
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