Barclays Wins Race For All-Global Stock ETF

March 28, 2008

BGI also launches single-country ETFs for Turkey, Thailand and Israel as well as an ETN for G-10 currencies. 


U.S. consumers looking for a true all-world fund just got one Friday as Barclays Global Investors launched four new exchange-traded funds, each opening direct access to different international markets.

Another global iShares ETF and an iPath foreign currency exchange-traded note also listed. Although they aren't first-to-market in their respective categories, each brings a new wrinkle to global investing.

Opening new ground to U.S.-based investors was a trio of single-country iShares, one each for Thailand, Turkey and Israel.

But the biggest asset attractor is likely to be the iShares MSCI ACWI Index Fund (NASDAQ: ACWI). It certainly boasts the broadest appeal with some 2,884 different stocks from developed as well as emerging markets in every investable market in the world.

"BGI's new global ETF enhances their franchise and strikes a blow to Northern Trust and others who were trying to come out with similar products," said Paul Mazzilli, director of ETF research at Morgan Stanley.

ACWI is also possibly the most unique of the group. And it's priced with an expense ratio of 0.35%, likely to open the rush for such all-encompassing, one-stop global ETFs at an attractive and affordable level for most investors. And the ETF tracks the MSCI All-Country World Index, one of the most widely followed in global markets.

Easy All-World Access 

In the fund's prospectus, it says BGI expects a 95% correlation with that benchmark. "This basically takes all of the different MSCI components and puts it together in one package," said Noel Archard, BGI's head of U.S. iShares product development. "We have a lot of clients who want single-country exposure. But certainly a lot also want single point-and-click access to the world."

All-world exposure exists to a limited degree in ETFs such as the iShares S&P Global 100 Index (NYSE: IOO) and the SPDR Dow Jones Global Titans Index (AMEX: DGT). But those are mega-cap focused with no meaningful emerging markets coverage. Both are also more expensive than ACWI.

At the end of 2007, the U.S. had about 42% of the MSCI All-Country index's weighting. Meanwhile, Canada represented 4% and Europe comprised 31%. Emerging markets made up 11% and Japan had 8.5%.

The ETF will use sampling techniques to replicate the MSCI index. "The Fund's use of a representative sampling indexing strategy can be expected to result in greater tracking error than if the Fund used a replication indexing strategy," according to the ACWI's prospectus.

ACWI also shoots for about 90% coverage of world markets. By comparison, the ETF that Northern Trust is planning to come out with later this year (using its own NETS all-world index) claims exposure to 98% of all global markets. Those also include the U.S. and other developed countries as well as emerging markets.

The iShares ETF was designed around its MSCI benchmark, says Archard, with both tracking error and bid/ask spreads in mind. "We want to be tight on tracking error in a product with enough liquidity in the marketplace to keep the spreads together," he said.


Also included in the launch is the iShares MSCI ACWI ex-US Index Fund (NASDAQ: ACWX). That will compete against several others, including the Vanguard FTSE All-World ex-US ETF (AMEX: VEU). With an expense ratio of 0.35%, it debuts about 10 basis points more expensive than VEU, however.

The differences, of course, will come down to index performance and construction. ACWX will rely on a combination of different benchmarks put together by the industry leader MSCI into a global ex-U.S. version.

Its breakdown between regions at the end of 2007 was skewed heavily to developed markets in Europe. The United Kingdom had 16.5%; France 8%; Germany 7%; Switzerland 5%; Spain 3.3% and Italy 2.9%. It also had Japan at 14.8%, some 6.3% in Canada and 19% in emerging markets.

The low-price leader among global ex-U.S. ETFs, VEU has nearly the exact same emerging markets exposure. The fund, which this month turned one year old, had about the same in Japan (14.3%) and slightly less in China (2.4% vs. ACWX's 3.1%).

"The new global products are sort of the caps to the pyramid," Archard said. "They fill out our product lineup very nicely."

The San Francisco-based fund giant now has 61 different international ETFs on the market.

On Friday, BGI also opened trading on:

  • The iShares MSCI Israel Capped Investable Market Index Fund (NYSE Arca: EIS).
  • The iShares MSCI Turkey Investable Market Index Fund (NYSE Arca: TUR).
  • The iShares MSCI Thailand Investable Market Index Fund (NYSE Arca: THD).

But the funds come with pricier expense ratios of 0.74% each. Since they track MSCI's investable markets indexes, all three will provide access to large- and small-cap stocks in those countries. Each has about 68 different names and the portfolios, despite their all-cap natures, will lean heavily toward the largest market-cap-sized companies.

"As countries continue to get more diversified, these were the next three that moved into our bubble as ETF candidates," Archard noted.

Also out is the iPath Optimized Currency Carry Exchange Traded Note (NYSE Arca: ICI). "We've got three single currency iPaths we launched last year," Archard said. "The advisor feedback we got was that they'd like to be able to invest in currency baskets as well. So this takes pretty standard institutional carry trade strategies and looks at the G-10 currencies."

With an expense ratio of 0.65% per year, ICI tracks the Barclays Intelligent Carry Index. That benchmark uses quantitative modeling to capture the returns of the highest-yielding currencies from G-10 nations. The methodology results in the portfolio taking long positions on some currencies and shorting in lower-yielding currencies.

But it doesn't have any set number of long and short currencies it'll take position in at any given time. As of February, the ETN was shorting the U.S. dollar, the Swiss franc, the Swedish krona and the Canadian dollar. It was long the six other currencies in its basket. Those were: the euro, the yen, the British pound sterling, the Australian dollar, the New Zealand dollar and the Norwegian krone.  

"There is some risk involved with a currency ETN," Archard said. "But ICI has a predefined methodology using a mean variance optimization strategy to keep volatility within about a 5% range."


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