Retire Rich

April 30, 2007

New Luxury Indexes Could Be Basis for Original ETFs

In their zeal to cash in on the latest investment craze, fund companies all too often have displayed a lack of originality and bad timing when launching new funds. Since exchange-traded funds have taken all of the major indexes, those that have come late to the ETF rage have come out with incredibly narrow niche and enhanced index funds that defy logic.

But a recent report of new luxury indexes could actually be the basis of some truly innovative, fresh ETFs. Proving that the rich really are getting richer, these so-called "blingdexes" that track stocks of companies that cater to the wealthy are booming, according to The Wall Street Journal. Although the indexes are new to the market, most of their sponsors have backtracked their performance; between 2001 and 2006, most of these luxury indexes would have returned an average of at least 13% a year.

Looking at another barometer, high-end department stores, analysts note that same-store sales for Saks Fifth Avenue and Barneys are double the retail sector's average, while their profit margins and revenue are also outpacing the broader markets.

Earlier this month, Merrill Lynch launched a luxury index of its own, called the ML LifeStyle Index. "The common denominator for all the stocks selected in our sample is they benefit from the increasingly hedonistic and eclectic consumption patterns," Antoine Colonna, an analyst with Merrill Lynch who helped create the index, told The Journal. Comprised of 15 to 20 stocks, it currently includes BMW, Porsche, LVMH, Bulgari, Coach, Burberry, Tiffany, Sotheby's and Julius Baer. Backtracking the index's performance, it was up 23% in 2005, 12.5% in 2006, compared to the MSCI World Consumer Discretionary Index's respective 14% and 7% rise.

Another recent entrant is Citibank, with its Plutonomy Index that launched in 2005. Citi also retroactively calculated the index's performance and found that it would have risen an average of 17.8% a year over the past 20 years. However, the index's creator, Ajay Kapur, recently left the firm to start a hedge fund, and Citi has since discontinued the index.

"Today, the good life is defined by the assets you have," said Margaret Mager of Goldman Sachs, which runs the Goldman Sachs High-End Consumer Index.

Don't be surprised if you hear about a new ETF unabashedly named "Lifestyles of the Rich and Famous."

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