The number of exchange-traded funds offered to investors is expected to more than double this year.
ETF pioneers State Street Global Advisors, Boston, and Barclays Global Investors, San Francisco, plan to launch a total of more than 50 ETFs, many this year.
While these relatively new mutual funds have not attracted much attention from big pension funds, according to consultants, they are of greater interest to smaller and midsized institutional investors.
7 years old
Exchange-traded funds, first introduced in 1993, are like index funds in that they contain a pool of individual securities from a particular market index such as the Standard & Poor's 500 or the Dow Jones industrial average. The difference? They trade on an exchange like a security.
"They are used quite extensively by institutional investors," said Lee Kranefuss, chief executive officer, individual investor group at BGI, a point that's not often recognized, he added. BGI manages 17 ETFs called World Equity Benchmarks, or WEBs. That means BGI offers more than half of the 30 ETFs now on the market.
Mr. Kranefuss estimates about 50% of BGI's $2 billion in ETF assets are institutional.
State Street Global Advisors launched the first ETF and is the current leader in the market in terms of assets under management. The first and largest ETF, the Spider, which tracks the S&P 500, has $16 billion in assets.
Gus Fleites, principal, head of exchange traded products, at SSgA, said, "Early on, the products weren't a screaming success, and I think the main reason is the market didn't understand them."
At SSgA, said Mr. Fleites, institutional investors historically have shown the most interest in these funds, but in the past few years there has been heightened interest from retail investors.
Some pension funds, particularly smaller ones, use them for index exposure, he said, instead of or alongside index funds. Another use is cash equitization, whereby institutional managers who hold a portion of their portfolio in cash can invest in highly liquid ETFs and get equity exposure.
"It allows them to be as fully invested as possible," said Mr. Fleites, and because ETFs are liquid, they can be sold for cash. In addition to the original Spider, SSgA has nine sector Spiders, which invest in different sectors of the S&P 500; the Diamond, which invests in the DJIA; and the TraHK
Fund, based on Hong Kong's Hang Seng index.
As of the end of February, assets in ETFs totaled more than $45 billion, according to Strategic Insight Inc., New York. That's more than triple the $14.7 billion in ETF assets at year-end 1998. In 1999, ETF inflows reached about $18 billion, according to Strategic Insight, up from an estimated $5 billion in 1998 and $2 billion in 1997.
To capitalize on this trend:
* BGI will launch 11 WEBs this year, which track Morgan Stanley Capital International indexes in overseas markets, including Brazil, Greece, Indonesia, South Korea, Portugal, South Africa, Taiwan, Thailand and Turkey; as well as the EMU WEB and the USA WEB for Japanese Investors. BGI also plans to launch 36 more ETFs, some this year, including: a series of S&P index products covering large-cap, midcap, and small-cap indexes and international indexes; a series of Russell products tracking the Russell 1000, 2000 and 3000 benchmarks; and a series of Dow Jones products based on the new Dow Jones Total Market Equity index.
* SSgA will launch nine ETFs, including large-cap growth, large-cap value, small-cap growth and small-cap value products based on Dow Jones indexes; a fund benchmarked against the Dow Jones Global Titans index; and others based on international markets.
Consultants said they don't see much interest in ETFs among larger pension funds primarily because the trading costs and expenses typically are higher than for other vehicles.
"Comparing it to an institutional portfolio," said Jim McKee, quantitative consultant at Callan Associates, Madison, N.J., "on an ongoing basis it made no sense to prefer these over a commingled vehicle or separate account vehicle on the basis of fees.
"We're certainly open-minded, we just need to see the competitive advantage."
In March, SSgA announced a trustee and administrative services fee reduction for the Spider Fund. Prompted by a recent growth spurt, expenses for the Spider will be capped at 12 basis points for the next two years in an effort to stimulate more growth.
While SSgA has about 60% of the market share of ETF assets, BGI has the highest number of ETFs, 17, and is adding more than twice that. "For us, ETFs make perfect sense," said BGI's Mr. Kranefuss. As the world's largest indexed money manager, "it's a very natural evolution for us into the ETF marketplace."
The 17 BGI WEB funds invest in MSCI indexes in 17 foreign markets. In addition to being used for cash equitization, Mr. Kranefuss said, the WEBs often are used by institutional investors that want exposure to a particular country or region without having to assemble a basket of individual securities from that area.