Smartshares Indeed

April 24, 2006

ETF designers halfway around the world have transformed ETFs into a real tool for savings and investment.

Sometimes, you have to look halfway around the world for the best ideas.  Smartshares, the exchange-traded fund (ETF) program for the New Zealand Exchange, has solved one of the most perplexing challenges facing ETF designers: How to allow individual investors to make regular investments in their ETF holdings.

Good investors know that they should save and invest money every month.  But that has been impractical with ETFs, as the commission costs involved in buying shares eat up too high a percentage of what most people can invest each month - say, $100, $500 or even $1,000.

Beginning last year, however, the New Zealand Exchange (NZX) - the only registered stock exchange in New Zealand - began allowing investors in all four of its ETFs to purchase shares on a regular basis without a commission.  The program proved incredibly popular with investors, with more than 70 percent of new shareholders signing on for the initial regular investment program.  The program uses a direct deposit system to withdraw funds from investors' bank accounts on a monthly basis - as little as $50/month - and invest that money in the ETF or ETFs of the investor's choice.  The shareholder then receives a regular statement saying how many shares they bought at what price.

It's a win-win situation: Shareholders benefit from the regular investment program and low costs, and Smartshares benefits by seeing their assets under management rise. Indeed, total AUM for the four Smartshares ETFs are up 17% percent since the program was launched last year, despite relatively moderate returns on the Kiwi stock market.

U.S. Efforts

Earlier this year, the Nasdaq made headlines when they launched a similar facility for their Nasdaq-100 exchange-traded fund (ETF), commonly known as the QQQs.  Unlike in New Zealand, however, the Nasdaq isn't sponsoring the program on its own. Instead, the exchange got together with MyStockFund Securities, LLC, a low-cost brokerage based out of Virginia, which agreed to wave its commission costs for investors who made regular investments in the QQQs. Nasdaq hopes that the new program can recharge interest in the QQQs, which have seen little asset growth in recent months.  And early results suggest it might.

"We're delighted with investor response to QQQDirect," says Wayne Lee, spokesman for Nasdaq. "Account growth has been very impressive, and traffic on the Web site has been constiently heavy. We think this has certanily captured the attention of dollar-cost averaging investors."

Nasdaq previously said it planned to extend the program to other Nasdaq-branded ETFs.

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