Around The World Of ETFs
By Journal of Indexes Staff

Energy ETFs Gain In First Half Of 2004

The 2003 stock rally, which catapulted into positive territory every U.S. equity-focused ETF at year-end, has continued during the first six months of 2004-but more cautiously. Returns have been mixed over the first two quarters for ETFs, and gains have not been as dramatic or widespread as in 2003.

Two discrete groups of ETFs outperformed from January to June; the first was an ex-U.S. country play, the other, a sector bet. iShares Austria (EWO) topped the charts with a 26% positive return, while energy and semiconductors hovered around 15%.

Given the geo-political climate, it's not surprising that the best performing sector from January through June was energy. The Select Sector Energy Spider (XLE), for example, was up about 15%, says Christopher Traulsen, head ETF analyst for Morningstar. Oil and gas companies make up nearly 79% of its basket, of which Exxon Mobil Corp is 22.6% and Chevron Texaco Corp is 15.9%. Oil companies have profited as higher global oil prices have led to higher net incomes.

Morningstar ETFs Begin Trading

While July and August are notoriously quiet periods in the market, the nine new iShares ETFs tracking Morningstar indexes have barely traded since their launch July 2. The new ETFs track Morningstar style box indexes, an investment tool dividing U.S. stocks into small-, mid- and large-cap segments, as well as value, core and growth categories.

Institutional investors, including specialists creating liquid markets and broker-dealers accumulating inventory for retail clients, have traditionally generated volume in the early stages of an ETF's development. However, the Morningstar brand has a distinct retail orientation, and doubtless some institutional managers are already using other products-most notably the iShares Barra growth and value versions of the S&P 500, S&P MidCap 400 and S&P SmallCap 600-to achieve asset allocation goals.

However, BGI has been increasing its penetration into the retail market which, as many analysts point out, is where the next wave of ETF investing resides. These new ETFs may be part of that effort.

Shanghai Stock Exchange To Launch ETFs

The Shanghai Stock Exchange has chosen two Chinese fund management companies to launch the exchange's first ETFs. The launch is expected later this year, and the ETFs would each track one of the exchange's two indexes, comprised of 50 and 180 stocks respectively.

Huaan Fund Management, Shanghai , and Huaxia Fund Management, Beijing , were selected in a tender that attracted 15 bids. Huaan is being advised by the Bank of New York during the launch phase. Dennis Zhang, Huaan's head of international cooperation, said the exchange will choose which firm tracks which index. Huaan already has a fund tracking the Shanghai 180 index, but the ETFs will be more widely marketed, making them more accessible to retail investors.

Recently, institutions stepped up investing in the top 50 and 180 stocks on the exchange. These stocks have gained in value while the several hundred of China 's 1,300-odd listed companies languished.

Ryan Leaves Firm He Founded To Start Investment Management Business

Ron Ryan, who constructed the Ryan Labs fixed-income indexes on which FITRs ETFs were based, has left Ryan Labs to start up an investment management firm, Ryan Asset/Liability Manager. Ryan had launched the firm in 1988 after leaving Lehman Brothers. The firm will continue to own and distribute Ryan Labs indexes, and will be run by CEO Sean McShea.

'Ryan Labs was mainly a research think tank. I designed the firm as a financial lab where we tried to solve financial problems,' says Ryan. 'Through time, we evolved into an asset management firm. In 1991, I designed the first liability index system after two years of development. Under my architecture, we became a leader in custom liability indexes. It became increasingly obvious through time that asset/liability management is the future of the investment industry."

Ryan Labs rose to prominence in the ETF world when it's indexes were chosen by Gary Gastineau's FITRs ETFs, which launched an innovative line of fixed-income ETFs at around the same time that an array of iShares fixed-income ETFS were launched. Within a year of launch, after the funds had failed to gain assets, all of the FITRs were closed.

The new Ryan ALM firm will focus on a hedge fund concept that uses a liability index fund matching strategy. It is designed to remove the deficit over the liability time horizon chosen while preserving principal. Essentially the core strategy will blend a Beta portfolio (bonds) with an Alpha portfolio (equity), to focus on a target liability schedule. It employs a 'portable Alpha' strategy that shifts the portfolio from Alpha to Beta as the deficit hurdle rate is achieved.

Ryan himself will serve as "chief financial architect" of the firm, focusing on portfolio management, while Bo Ohanesian serves as president and leads a team that handles the operational issues of the firm itself.

Two iShares Switch To New FTSEEuroFirst Indexes

Barclays Global Investors (BGI) has announced that beginning in the fall of 2004 two of its European ETFs, the iShares FTSE Euro 100 and iShares FTSE Eurotop 100, will switch to FTSEEurofirst Indexes. The new indexes, developed in conjunction with Euronext.Liffe, are meant to help Euronext chip into the index derivatives dominance enjoyed by rival Eurex, with STOXX derivatives products.

The ETFs will continue to be traded on the London Stock Exchange, Euronext Amsterdam, Borsa Italiana, Virt-Ex and SWX exchanges. The new indexes were developed for optimal trading, with good liquidity and broad market representation. The iShares FTSEurofirst ETFs will track the performance of the largest listed pan-European companies, and are designed to capture the broadest available selection of European companies with minimal tracking error for both retail and institutional investors.

Mark Makepeace, chief executive of FTSE Group, says, "When we created the FTSEurofirst Index Series in 2003, we aimed to develop the most accurate and flexible pan-European tradable index suite on the market. BGI's news that it will switch to the FTSEurofirst series is a strong indication of the relevance of the index to the market today, and proves that it has already become established as a pan-European market indicator."

Bruce Lavine, head of iShares Europeat BGI, says, "We are always striving to improve the iShares product offering to investors. Tracking an improved benchmark that is increasingly visible to the investing community will benefit our existing shareholders and provide a better ETF in the long run for institutional and retail investors. Additionally, investors should also benefit from the existence of futures contracts on the new benchmark."

Recent Share Movement of Barclays PLC in British Pence

There long has been open speculation about the Barclays PLC company selling off Barclays Global Investors, the investment management arm responsible for the iShares. Now, however, the parent company's share price is moving on speculation that it may be a takeover target for Citigroup Inc.

Since speculation of a potential takeover, Barclays shares have swung wildly up and down, moving as much as 11% a day . All of this comes amid persistent denials that the two parties are actively negotiating. According to a Wall Street Journal report, in fact, a Barclays PLC spokesperson pointedly remarked that the company has bought back 450,000 of its own shares over the past week, which it couldn't have done if the company were in negotiations.

Discussion of the takeover began when the Banco Santander Cental Hispano announced that it had launched a bid to take over Abbey National Bank, which is the United Kingdom 's sixth largest bank. Barclays PLC is the U.K. 's third largest bank, and has a market capitalization of more than £34 billion (about $62 billion) . The bid for Abbey National Bank was reported to be around  £8 billion (or $62 billion )

While the iShares now appear to be established enough that they are not likely to disappear any time soon, it will be interesting to see the effects of a potential deal on Barclays Global Investors, which is currently ranked as the world's second largest investment manager with around $1 trillion under management. According to a recent report, the Barclays Capital arm of Barclays PLC enjoyed record first half earnings of £599 million (or more than $1 billion dollars) and hired more than 1,000 new employees as a result.

British banks have become attractive targets of late because of their relatively low valuations. Time will tell if the discussion is just noise, or leads to a significant shakeup in the index industry.

State Street To Sell Hong Kong Tracker In Japan

State Street Corp plans to sell the Hong Kong Tracker (TraHK) to Japanese investors. The ETF was first launched in Hong Kong in 1999, and holds all the stocks in the Hang Seng Index.

Japan has been the fastest growing ETF market worldwide. In addition to domestic ETFs, "Japanese investors have shown a strong appetite for ETFs covering the U.S. and Australia , and we anticipate they will be eager to diversify their exposure by adding TraHK to their portfolios," says Mark Lazberger, president and chief executive of State Street, Japan .

New Indian ETF For BAM Bumps Total To Four

Mumbai's Benchmark Asset Management Company Pvt . Ltd. launched its fourth ETF under the Benchmark Mutual Fund umbrella. The Banking Index Benchmark Exchange

Traded Scheme trades on the Capital Market Segment of the National Stock Exchange of India.

It tracks the CNX Bank Index, comprising 12 of the most liquid large-cap Indian banking stocks. The initial offering period for Bank BeES ran from the end of May to the end of June, with ongoing subscriptions available from mid-July. Each unit has a value of INR10 (US$0.22) the minimum investment is INR10,000 (US$220) initially and INR1,000 (US$22) thereafter.

Growth and dividend options are available, and the fund will begin investing as soon as a subscription target of INR10,000,000 (US$220,325) is reached. The management fee is 0.15% per annum, with a trusteeship fee of 0.01% per annum. BAM will cover initial issue expenses.

BAM currently manages three other ETFs under the Benchmark Mutual Fund. The Nifty Benchmark Exchange Traded Scheme (Nifty BeES) was India 's first ETF when it launched in December 2001, and has returned 27.8% since inception. The Nifty Junior Benchmark Traded Scheme (Junior BeES), launched February 2003, has returned 121.9%. The Liquid Benchmark Exchange Traded Scheme (Liquid BeES), which launched in July 2003, has returned 4.4%.

Fresco Euro Stoxx 50 B Launched In Germany

The institutional Class B shares of the Fresco Dow Jones Euro Stoxx 50 ETF began trading on Deutsche Börse's XTF segment in late July. The Fresco 'Bees' ETF tracks the DJ Euro Stoxx 50 but each share is equivalent to 1000 'regular' shares, allowing institutional investors to both reduce their trading costs and enjoy the significantly lower 0.24% management fee, the lowest of any ETF based on the Euro Stoxx 50 index.

In the first half of 2004 the XTF market share totaled 55.2%, representing an increase over last year's 54% for the same period. ETF fund volume in the segment also reached a record level of 14.4 billion euros (US$ 17.71 billion) at the end of June, up 60% over the billion euros (US$ 11.07 billion) recorded at the end of June 2003.

Deutsche Börse is now offering free real-time prices for ETFs on its website. At , investors have access to the Xetra Live screen which, like the professional Xetra trading screen, displays a range of information including the ten best buy and sell offers for all products.