iShares Select Dividend & TIPS Begin Trading On NYSE

January 01, 2004

The first dividend-focused iShare was launched on the New York Stock Exchange. The Dow Jones Select Dividend Index Fund (ticke r: DVY) becomes the first of its kind. The fund consists of 50 of the highest-dividend U.S. companies, and comes at a time of turbulent markets when companies that actually pay dividends have become attractive to many investors. The fund hopes to capitalize on the U.S. tax code changes regarding dividends.

The index itself is very interesting because it is weighted based on dividend payout, so that the index is weighted toward the companies that have the highest dividend payout rates. The index is rebalanced once a year and a company's weight is based on its indicated annual dividend. The fund does not hold any REITS, but otherwise includes companies that are among the most consistent highest- yielding stocks. The new iShares will be managed by Barclays Global Fund Advisors, and has an expense ratio of 0.40%.

In addition to being the first dividend- weighted ETF, the launch of the fund is also remarkable because it is only the fourth primary ETF listing on the NYSE and the first in over a year. The launch may well signal the NYSE's intention to ramp up its primary ETF listings. The iShares S&P Global 100 and two Dow Jones STOXX-based Fresco (UBS Global) shares currently are listed on the NYSE. The NYSE also trades a significant number of ETFs under unlisted trading privileges (UTP).

"The New York Stock Exchange is proud to be the listing market of choice for the new ETF," said Catherine Kinney, NYSE president and co-chief operating officer. "We look forward to providing investors with a high-quality market for this new and timely product."

The criteria for inclusion in the index includes a strong track record for consistent dividend payout, based on the following criteria:

• A positive historical five-year dividend- per-share growth rate

• A five-year average dividend payout percentage rate less than or equal to 60% of earnings.

• Annual average daily dollar trading volume greater than $1.5 million.

"We are pleased to provide investors with an ETF that can help them capitalize on the new dividend tax law. Rather than having to choose which dividend-paying companies to invest in, investors can purchase the iShares Dow Jones Select Dividend Fund and own a diversified basket of 50 of the highest-yielding dividend companies in the U.S. equity market," said Lee Kranefuss, CEO of BGI's Intermediary Business.

iShares Launches First TIPS Exchange-Traded Fund

The iShares Lehman TIPS Bond Fund (ticker: TIP) began trading on the New York Stock Exchange. The fund is the only exchange-traded fund available that tracks inflationprotected public obligations of the U.S. Treasury, commonly known as "TIPS," which are designed to provide inflation protection to investors. The new fund has an expense ratio of 0.20%.

"Because of low correlation to other asset classes, the iShare s Lehman TIPS Bond Fund can help provide a high level of diversification in portfolios," said Lee Kranefuss, CEO of BGI's intermediary business.

TIPS are income-generating instruments whose interest and principal payments are adjusted for inflation. The inflation adjustment, which is typically applied monthly to the principal of the bond, follows a designated inflation index, the consumer price index (CPI). A fixed coupon rate is applied to the inflation-adjusted principal, so that as inflation rises both the principal value and the interest payments increase.

The Lehman Brothers U.S. Tre a s u ry Inflation Notes Index measures the performance of the inflationprotected public obligations of the U.S. Treasury. As of September 1, 2003, there were 11 issues included in the index. To be included the bonds must be U.S. Tre a s u ry Inflation Protected securities, have at least one year to final maturity and have at least $200 million par outstanding.

The U.S. Treasury first offered TIPS in 1997, and many investors use them to hedge against inflation since the value of TIPS changes in line with the Consumer Price Index (CPI). If the CPI goes up, then the value of TIPS (as well as the interest payments) also rises. However, investors receive some degree of protection against deflation because the final payment cannot be less than the TIPS original par value. TIPS prices will go down when the CPI falls, but they can never go below the original par value.

"In any environment there are several components to your total bond return," said J. Parsons, managing director of Barclays' intermediary business. "One factor is the general level interest rate movement, another is the shape of the yield curve, another is the spread that instruments trade over a standard Treasury, and the last is inflation. With TIPs, you're protected against inflation but you're still exposed to the other risks."

TIPS have become an increasingly popular asset class. Va n g u a rd introduced a TIPS fund in 2000 that has nearly $4 billion in assets, according to the Vanguard Web site. The Vanguard fund has an expense ratio of 0.22% compared to 0.20% for the TIPS iShares, although investors must consider the brokerage commissions for ETFs when calculating total costs.

"TIPS are an attractive investment," said Morningstar analyst Christopher Traulsen. "One of the knocks against bonds is that they generally don't offer enough re t u r n to keep pace with inflation longterm, which is why people have stocks in their portfolios. With TIPS, their principal is indexed to the CPI. Since the coupon pays a p e rcentage of principal, it also goes up with CPI. At maturity, you get the greater of the inflationindexed principal or the original principal. So in the event of deflation, you won't get less money back than you invested. The tradeoff is that the yield is going to be somewhat smaller than it would be for a Tre a s u ry with an equivalent maturity."

Although TIPS have performed well lately, BGI's Parsons cautioned that investors must be careful, as always, not to chase the hot asset class.

"TIPs are not a panacea-they're just an effective tool that can fit into your portfolio, especially if you're concerned about inflation," said Parsons.

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