Exit Of NETS Opens Door For Single-Country ETF Start-Up

February 18, 2009

Can a tiny new ETF provider targeting niche foreign markets find success using a similar strategy as giant asset manager Northern Trust? 


With Northern Trust bowing out of the exchange-traded funds market, a new player is moving aggressively to become the predominant provider of single-country international funds.

Global X Management Co., a New York-based start-up, has launched its first ETF. And more are on the way, each targeting niche markets outside the U.S. 

"They're trying to be the big fish in a relatively small pond," said Jeff Tjornehoj, a Lipper analyst. "The question really is whether there's enough interest in such tiny and volatile corners of the world."  

Northern Trust took much the same approach when it decided to enter the ETF marketplace last spring. The Chicago-based financial giant started with a flood of single-country portfolios branded as NETS. The company, a leading asset manager for institutions, described its strategy at the time as setting the table for more all-encompassing global funds.

But it never got that far. After bringing to market 17 different single-country NETS, most last April and May, Northern Trust decided to throw in the towel. It cited a lack of assets and deteriorating market conditions as reasons influencing that decision. (See related story here.)

So what makes a small start-up like Global X think it can go where Northern Trust couldn't?

For one, Global X's managers say they're going to be patient. Bruno del Ama, the company's chief executive, noted that Northern Trust tried to jump-start its efforts with a series of broad launches last April and May. In less than two months, the firm brought to market 14 different niche ETFs -- all but three of its eventual lineup. 

Northern Trust has declined to discuss details of its strategy and decision to exit the ETF marketplace. 

"We're not going to launch a dozen or so ETFs at the same time, like Northern Trust did," said del Ama. "And most of the Northern Trust funds were second-movers. They were almost all targeting markets that already had direct competitors." 

So far, Global X has registered to sell ETFs targeting a total of six markets. Earlier this month, the Global X/InterBolsa FTSE Colombia ETF (NYSE: GXG) launched, providing U.S. investors with their first pure exposure to that slice of the market.  

Five others are in various stages of the regulatory process. Those would target: the Philippines; Peru; Argentina; Egypt and a regional fund tracking Nordic countries.

Barclays Global Investors has filed for an iShares ETF to focus on Peru. And Market Vectors has filed for a fund tracking Egypt. But even if it doesn't gain first-to-market status in those countries, the rest will represent uncontested opportunities for Global X. 

And more are likely on the way from the upstart ETF sponsor. But as with GXG, the company's plan is to duel-list shares in both the U.S. and each fund's local exchange. 

"It's basically impossible to list foreign ETFs in the U.S. At the same time, it's relatively easy to list U.S.-based funds on many foreign exchanges," said del Ama. "We plan to list our ETFs locally in places like Colombia and the Philippines. In many cases, we'll be providing institutional and retail investors in those countries with their first direct exposure to ETFs."

He says that the firm's Colombia ETF is nearing a listing on the Bolsa exchange.

"We're taking a two-pronged, global marketing approach by duel-listing on both U.S. exchanges and in the local markets of each ETF," said del Ama. "It will help build asset growth and provide more liquidity for efficient investing by investors in all markets."

If They Build It, Will Investors Come?

As an adviser to high net worth and institutional investors in the U.S., Richard Shaw says that he's very interested in seeing a Nordic ETF. But the president of the QVM Group adds that Colombia and others on Global X's initial fund list are less attractive.

"As a group, most of these are still very young economies that still need to do a lot of growing," said Shaw. "They're just not mature enough to interest me or most of our clients."

But he says that duel-listing makes a lot of sense. "There tends to be a home bias in investing," said Shaw. "And in second- and third- world countries, there are usually a lot of questions about the integrity and honesty of local custodians."

A U.S.-based company with credible management and well-known indexes, he adds, would probably seem very attractive to local investors in smaller markets. "With duel-listing outside of the country, they might in fact attract more assets in local markets than the U.S., at least initially," said Shaw.

But it could take time. With stock market volatility so high, says Lipper's Tjornehoj, the company might have difficulty convincing enough investors that such tiny markets are worth venturing into right away. 


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