Riding The Wave

September 01, 2005

Exchange - Traded Funds

An area of particular interest has been the use of ETFs to gain commodity exposure. An ETF is an investment vehicle used by both institutional and retail investors that seeks to match the performance of an index or other benchmark. U n l i ke mutual funds, ETFs are priced throughout the day, can be traded like stocks and offer better transparency to investors. Operating expenses are generally lower for an ETF than for a mutual fund that tracks the same index. This is because the ETF does not provide the same level of services to investors (service call centers, periodic statements, check writing facilities, etc.). Investors pay commissions when buying or selling ETFs.

At the end of 2004, State Street Global Advisors launched the first U.S.-traded ETF based on commodity prices: The Gold Bullion Securities ETF (GLD), which attempts to mirror the price of gold, has been well received, with average volume approaching two million shares a day. The product has an annual expense ratio of 40 basis points. Barclays Global Investors (BGI) followed up with another gold ETF (IAU) soon after. The positive reception of these products shows the appetite of investors for direct commodity exposure.

More recently, an ETF that tracks the GSCI was listed in Europe (Deutsche Börse and SWX Swiss Exchange). This is the first ETF based on a commodity index. The product charges a 45-basis-point annual management fee.

But there's a catch. Because this product has not received Securities and Exchange

Commission (SEC) approval, it is not available to U.S. investors. A similar p roduct has been filed with the SEC in the U.S. by Barclays Global Investors. The approval process is a long one, however, 0ften taking several years-especially for a product such as this one, with its multi-faceted characteristics (a commodity p roduct, in a fund structure, that trades like an equity).

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