Beyond The Abstract: Morgan Stanley Report Lists ETF Pluses

June 25, 2008


A Rapidly Expanding Field

The report also delves into the spectacular growth of ETFs, pointing out that 70% of the 698 ETFs in existence at the report's publication had been listed in 2006 or later, and it discusses that growth in terms of category. And this is where Mazzilli and Co. provide another really cool table—one that tells you how many ETFs were issued in 2005, 2006, 2007 and 2008 (year-to-date) and what categories they fall into.

Fifty-two ETFs were issued in 2005, for example, and most of those—44 ETFs—were U.S. equity funds. In the first five months of 2008, less than one-sixth of the 65 ETFs issued were domestic equity funds; instead, the largest concentration of launches was in international equity ETFs, which saw 25 launches (34 if you add in the 9 global equity ETFs that were also launched). In between those years though, you can see a story developing.

In 2006, a whopping 101 domestic equity ETFs were issued and just 24 international equity ETFs and five global equity ETFs. In 2007, domestic equity ETFs were slowing but still going strong, with 97 product launches. However, that same year also saw the launch of 53 international equity ETFs and 13 global ETFs—both categories essentially doubled the number of issuances from the previous year.

But 2007 was an interesting year for a few ETF categories. It was also the year that leveraged and inverse ETFs really came into their own: In 2006, that category saw the introduction of just 12 funds, but in 2007, that number jumped to 52 ETFs—or about 76% of the leveraged and inverse ETFs in existence at the time of the report's publication.

Fixed-income ETFs, long a neglected category in the ETF arena, also saw some dramatic changes, with 45 funds launching in 2007 alone. Before 2005, there were perhaps five fixed-income ETFs in existence, and none even launched in 2005. Those 45 ETFs launched in 2007 represent about 76% of the total population of fixed-income ETFs.

Morgan Stanley puts the total assets in ETFs at $607 billion as of the end of May. The market share for domestic equity is nearly 55%, while international and global equity combined stands at roughly 29% market share. Fixed income is the third-largest weighting at 7.4%, followed by commodity ETFs (5%), leveraged and inverse ETFs (3.1%) and currency ETFs (0.9%).

Which ETFs?

The report also lists the many ways ETFs can be used in asset allocation models and portfolios and offers samples of its own asset allocation frameworks and models. It's interesting to see which ETFs are being used in the portfolios.

For example, in its U.S. equity segment of its GWM Tactical Framework model, Morgan Stanley uses the iShares that track the value and growth versions of the S&P 500, the S&P MidCap 400 and the S&P SmallCap 600 indexes, while its international equity segment uses only Vanguard ETFs—the Vanguard European ETF (AMEX: VGK), the Vanguard Pacific ETF (AMEX: VPL) and the Vanguard Emerging Markets ETF (AMEX: VWO).

The moderate fixed-income model for a $1 million portfolio puts about 35% of the total investment into the iShares Lehman MBS Index Fund (AMEX: MBB) and 30% into the iShares iBoxx $ Investment-Grade Corporate Index fund (NYSE Arca: LQD), with a 15% allocation to the iShares S&P U.S. Preferred Stock Index Fund (AMEX: PFF) and a 5% allocation to the SPDR Lehman International Treasury ETF (AMEX: BWX). That leaves 15% of the fixed-income portfolio unaccounted for, but the rest is designated for federal agencies - which are not represented by an ETF.

Finally, the U.S. sector model for a $1 million portfolio is based on the S&P 500's Global Industry Classification System (GICS), and not surprisingly, uses the Select Sector SPDRs, except for the telecommunications and technology sectors. Those two sectors are combined into one ETF in the SPDRs family, so Morgan Stanley uses the iShares Dow Jones U.S. Technology Index Fund (NYSE Arca: IYW) and the iShares Dow Jones U.S. Telecommunications Index Fund (NYSE Arca: IYZ), overweighting IYZ and underweighting IYW in comparison to the sector weights of the S&P 500.

The model also overweights the energy, health care and utilities sectors, while underweighting the financials, industrials, materials, consumer discretionary and consumer staples sectors.

In all it's a very interesting report for market participants of all levels of experience. There are the nuts and bolts of ETFs that will appeal to novices and offer a useful refresher for others. There's also the interesting data nuggets that one can glean from the tables provides within the report and which paint an interesting picture for people familiar with the growth of ETFs.

Finally, there's the model portfolios, which provide a glimpse at which ETFs are being used at one of the world's largest financial institutions and how—which should be of interest to investors at every level.


Heather Bell is assistant editor of She can be reached at [email protected].


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