Around the World of ETFs

January 01, 2005

Nasdaq ETFs Break The 401(k) Barrier

ETFs in your 401(k)? Never happen, right? Think again.

In a move that could spell big news for both ETF providers and retirees alike, a small firm based in Portland, Ore., has figured out a way to marry the two previously irreconcilable financial products. The firm, Invest n Retire LLC, began offering four Nasdaq index ETFs in its 401(k) platform and model portfolio in September.

"Investor demand compelled us to find a way," said Darwin Abrahamson, founder and CEO of Invest n Retire.

Commission costs have always been the impediment separating ETFs and the lucrative 401(k) market. Invest n Retire's breakthrough involves a plan to lump together trades from all of its 401(k) investors on a daily basis, thereby lowering the bite of the commission to an almost imperceptible level.

"This breakthrough development is consistent with Nasdaq's vision of fairness and transparency," says John Jacobs, CEO of Nasdaq Financial Products Services Inc. "ETFs can be an invaluable tool to employees who wish to achieve a balanced portfolio with certainty and efficiency."

Invest n Retire currently offers four ETFs in its 401(k) platform: Fidelity Nasdaq Composite Index Tracking Stock (ONEQ), Nasdaq-100 Index Tracking Stock (QQQ), BLDRS Emerging Markets 50 ADR Index Fund (ADRE), and BLDRS Developed Markets 100 ADR Index Fund (ADRD).

Ameritrade has also launched an ETF program for long-term investors aimed at getting around the remove the problem of commissions. At Ameritrade, the traditional commissions are replaced with an asset-based management fee.

Mutual Funds Increase Investments In ETFs

At the end of the second quarter, Morningstar Inc. counted 44 mutual funds that had more than 6% of their assets invested in ETFs, while another 368 funds had a smaller percentage of assets in ETFs.

"Within five years, as more ETFs increase in size, their use will be more common in active portfolio management," writes Bryon Wien, a Morgan Stanley senior investment strategist, in a recent report.

SRI Product Enters ETF Market

With 96 iShares trading in the U.S. alone, you might think that Barclays Global Investors has ETFs covering just about every conceivable corner of the market. Yet once again BGI has broken new ground, this time with a proposed ETF designed to track a socially responsible index. The registration statement for the iShares KLD Select Social Index Fund was filed in mid-July, and is currently awaiting SEC approval.

Although this will be the first U.S. ETF to offer exposure to companies screened for social responsibility, the traditional mutual fund industry has been offering socially screened mutual funds for years. According to the Social Investment Forum, more than $2.15 trillion is invested in socially screened portfolios.

iShares Takes STOXX of the ETF Scene in Europe

Barclays Global Investors (BGI) has reached an agreement with STOXX Ltd. to license the full spectrum of STOXX style and capitalization indexes for use as the underlying for new ETFs.

"This extension of our license agreement with BGI confirms the success of the Dow Jones STOXX index series," said Lars Hamich, managing director of STOXX Ltd.

STOXX and BGI have become fast friends since BGI acquired the rights to the STOXX 50 ETF from Merrill Lynch in September of last year. That ETF - now called the iShares Dow Jones Euro STOXX 50 - is currently the largest ETF in Europe, with assets of EUR 2.2 billion.

Since the new agreement was reached, BGI has rolled out funds covering European mid-cap equities (iShares DJ Euro STOXX MidCap) and European small-caps (iShares DJ Euro STOXX SmallCap). The group has also launched a Japan ETF as well, the iShares MSCI Japan.

"We are revolutionizing the way investors can get exposure to important market segments," says Bruce Lavine, head of iShares in Europe. "ETFs are increasingly being seen as a useful tool that delivers institutional-level products and pricing to investors both big and small."

STOXX Rides the Coat Tail of EU Expansion

With liberalizing economies and an expanding European Union (EU), business in Eastern Europe is booming.  It's not surprising, then, that the largest index provider in Europe - STOXX Ltd. - wants in. 

Citing customer demand, STOXX has launched two indexes designed to track the performance of the ten Eastern European countries that joined the EU earlier this year: the Dow Jones STOXX EU Enlarged Total Market Index (TMI), a broad benchmark index, and the Dow Jones STOXX EU Enlarged 15, a blue-chip index.

The EU Enlarged 15 is a subset of the TMI, pulling out the 15 largest and most liquid names to create an easily tradable index.  The15 names represent nearly 50% of the total market capitalization of Eastern Europe.

"The Dow Jones STOXX EU Enlarged 15 index … is suitable to be used as an underlying for financial products such as funds, exchange-traded funds, structured products and derivatives," said Lars Hamich, managing director of STOXX Ltd. 

An ETF would be welcome relief for investors, as expense ratios on the better performing Eastern European funds start close to 2% and go up from there.  It's important to note, however, that most mutual funds with the words "Eastern Europe" in them have major holdings in Russia, which is not represented in either of the new STOXX indexes.

The countries that entered the EU this year are: Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia.

(OOO)h What A Debut!

State Street Global Advisors brought its own twist to the ETF market this Fall with the launch of the SPDR O-Strip exchange-traded fund (ETF).

The new ETF is based on Standard and Poor's recently launched O-Strip Index, an index of all the Nasdaq components "stripped" out of the S&P 500. Currently, that list includes 74 names, representing approximately 15% of the S&P's market cap.

One of the key uses of this ETF will be for investors looking to create a basket of S&P 500 stocks. Currently, investors can buy all 426 NYSE-traded members of the S&P 500 with a single click of a mouse, using a portfolio trade. But there's no comparable way to buy the 74 names in the Nasdaq; investors are forced to pick them up one by one. With the new ETF, investors should be able to pick up exposure to those names in one fell swoop.

Traders will also be able to use the ETF to create an enhanced S&P 500 index, either over- or underweighting the Nasdaq portions to suit their needs.

Talking Turkey: First ETFs Come To Istanbul

Three financial forces ¾ the American Stock Exchange, Dow Jones and Finans Portfoy, one of the leading asset managers in Turkey and an affiliate of Finansbank ¾ have come together to bring the world of ETF investing to the cradle of civilization.

With oversight from AMEX, Finans Portfoy will launch the first ETF ever to trade in Turkey by the end of the year. The new fund will track the Dow Jones Turkey Titans 20 index, and comes less than two months after the launch of that index on August 3, 2004.

The free-float Turkey Titans index represents the 20 largest and most liquid companies in the Turkish market

DJ's Italy Titans ETF in the Works

Dow Jones' Italy Titans 30 index is rapidly gaining traction in the European marketplace. With Eurex futures and options contracts already on the market, Indexexchange is now preparing to add an Italy Titans 30 ETF to the mix.

"We are proud to have the opportunity to extend the many advantages of ETFs- liquidity, transparency and flexibility at extremely low prices-to the Italian market," says Thomas Meyer zu Drewer, chief information officer of Indexchange.

The Italy Titans 30 index covers thirty of the largest companies in Italy. The index was launched in April 2002 in response to what Dow Jones called the "exclusive nature of existing derivative and exchange-traded fund licenses" for the dominant Italian index, the Milan Italy Stock Exchange 30 (MIB 30). The MIB 30 is sponsored by the Italian Stock Exchange, and Dow Jones' makes no bones about the similarity of the two indexes.

"As 29 out of the 30 stocks of the MIB 30 are represented in the Dow Jones Italy Titans 30, the index is a comparable tool to the MIB 30 with the additional advantage of being UCITS III compliant," says Lars Hamich, managing director of STOXX Ltd.

Vanguard Marches On With Four New VIPERs

Vanguard added four new ETF to its existing portfolio of VIPERs this September: Vanguard Energy (VDE), Vanguard Industrials (VIS), Vanguard Telecommunications Services (VOX) and Vanguard REIT (VNQ).

The ETFs build on Vanguard's burgeoning relationship with Morgan Stanley Capital Indexes (MSCI). Three of the four new VIPERs track MSCI sector indexes, while the fourth, the VNQ, tracks a separate Morgan Stanley index for which there is no comparable MSCI index.

Vanguard currently has nearly $4 billion in VIPERs assets.

iShares MSCI ETFs Reduce Annual Fees

  iShares country ETFs became substantially cheaper as of July 1, as Barclays Global Investors announced the removal of 25-basis-point 12b-1 fees from the international ETFs. The funds track MSCI country indexes.

The 12-b1 fee was a marketing-related fee impacting 22 of the ETFs. Following the removal, net expense ratios for the funds dropped to 74 bp from 99bp for the emerging market ETFs, and to 59bp from 84bp for the developed market ETFs.

Those with expense ratios dropping to 0.74% of assets include: South Korea (EWY), Taiwan (EWT), South Africa (EZA) and MSCI Brazil (EWZ).

Those with expense ratios dropping to 0.59% of assets are: Australia (EWA), Hong Kong (EWH), Japan (EWJ), Malaysia (EWM), Singapore (EWS), Austria (EWO), Belgium (EWK), France (EWQ), Germany (EWG), Italy (EWI), Netherlands (EWN), Spain (EWP), Sweden (EWD), Switzerland (EWL), United Kingdom (EWU), Canada (EWC), Mexico (EWW) and the EMU (EZU).

$600M Gold ETF Glistens After Restructuring

Gold Bullion Securities Ltd. (GBS) delisted its gold ETF in London at the end of April due to a technicality, although the fund was returned quickly to the market after restructuring. The ETF was removed from the London Stock Exchange only five months after its December launch, and outstanding securities were redeemed in early May.

The ETF was restructured because institutional investors were concerned that it violated the new UCITS (Undertaking for Collective Investment in Transferable Securities) directives. Although GBS believes the original ETF was UCITS compliant, investors were concerned that ownership of the ETF could be construed as direct ownership of gold, which is prohibited under UCITS.

Two Japanese ETFs To Delist

After months of low volume and lackluster interest by investors, two of the 17 ETFs currently trading in Japan were shuttered. The Nomura FTSE (1616 JP) ETF (traded on the Osaka Stock Exchange) was shuttered at the end of August, and the iShares TOPIX ETF (1307 JP) (traded on the Tokyo Stock Exchange) closed September 10.

These two ETFs contributed little in volume or assets to Japan's otherwise substantial ETF effort. At the end of July, Japan was second only to the U.S. in its total assets under management. At that time, Japan's ETFs had assets of $26.5 billion, while the U.S. had $171.4 billion, and Europe $24.5 billion.

Meanwhile, five foreign-domiciled ETFs are now available for sale in Japan through Japanese brokers. Foreign securities can be offered domestically in Japan as long as the Financial Services Agency is notified; its approval is not required.

ETFs that have filed notifications in Japan are:

Description Ticker Exchange


Diamond DIA U.S. AMEX

Australian Stock Exchange

Tracker Fund of Hong Kong 2800 HK Hong Kong Stock

(Source: Morgan Stanley ETF Strategies)

Canada Exempts ETFs From Its Short Sale Rules

Like U.S.-based ETFs, Canada's 17 ETFs can now be shorted on a downtick. Market Regulation Services Inc. (RS) approved amendments to the Universal Market Integrity rules regarding short sales and regulatory halts in Alberta, British Columbia, Manitoba, Ontario and Quebec.

The amendments, which expand the ability to exempt securities from Canada's short sale rule, includes ETFs because they represent baskets of securities that trade throughout the day and therefore are not prone to the same manipulative pressures as other securities.

Shorting On A Downtick Unavailable To 8 HOLDRS

Eight out of 17 Merrill Lynch HOLDRS have had their downtick exemption revoked.

The Securities and Exchange Commission originally exempted all HOLDRS from the so-called downtick rule (rule 10a-1), as it did with all ETFs. But because HOLDRS (unlike ETFs) are baskets of securities whose constituents never change, the SEC added two caveats: Should the number of constituents in a HOLDRS fall below 15, or if a constituent's daily volume falls below $1 million, the product looses its 10a-1 exemption.

HOLDRS without short sale uptick exemption:

Name Ticker Effective date
Internet HHH Nov 27, 2001
B2B Internet BHH Aug 27, 2002
Internet Infrastructure IIH Mar 21, 2003
Telecom TTH May 17, 2004
Broadband BDH July 12, 2004
Wireless WMH July 12, 2004
Software SWH July 29, 2004
Europe 2001 EKH Aug 16, 2004

( Source: Amex )

Since their launch, the HOLDRS have not enjoyed the same rapid adoption as ETFs. At the end of July, the HOLDRS had some $7.8 billion in assets, while U.S. ETFs had some $171.3 billion.

Some HOLDRS are lively enough, however, with at least one of the group appearing regularly on the Amex's weekly top-ten volume chart. It is unclear just what effect losing the 10a-1 exemption will have on a HOLDRS in terms of volume and assets.

The Amex, which monitors HOLDRS' activity regarding Rule 10a-1, is considering petitioning the SEC for better criteria on which to revoke the exemption.

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