ISDEX fund update! TheStreet.com just put out an article a few minutes ago on investment choices for Internet index funds. I'm a longtime follower of this thread and particularly a longtime fan of Steve Harmon - I've been annoying him about starting the fund. Hopefully, I will not have to pester much longer...
This article is available with trial subscription. But I don't think Dagen McDowell should mind since I've provided her with material for
her column in the past...
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Mutual Funds
Dear Dagen: When Will I Be Able to Invest in an Internet Index
Fund?
By Dagen McDowell
Senior Writer
6/29/99 11:51 AM ET
URL: thestreet.com
Is there an index fund to play the Internet or a SPDR (SPY:AMEX) for Net stocks?
-- Lawrence Rosof
Lawrence,
Sometimes it seems there are more Internet indices than there are companies. Consider: TheStreet.com Internet Sector
index, the ISDEX, the Inter@ctive Week Internet index and the Dow Jones Internet index, to name a few.
For now, you can watch them bounce around like spaldeens. No one has yet launched an actual mutual fund based on any of
them. But like all things Internet-related, one is probably coming soon.
The first index fund could be one based on the ISDEX, a 50-stock index started in April 1996. British investment firm
Investec Guinness Flight is negotiating to license the index from internet.com (INTM:Nasdaq), a network of Internet sites
that went public last week. At one point, money manager Reich & Tang also was jockeying for the right to use the ISDEX
as the basis for an index fund, but that firm has dropped out of the competition.
However, Guinness Flight is not yet the clear-cut victor. "We are very strongly interested in [Guinness Flight], and they are
certainly the front-runner," says Alan Meckler, chairman and chief executive officer of internet.com. But there is still
competition for the rights to the index, and the company will probably make a decision before the end of this week, Meckler
adds.
Investec Guinness Flight, which manages several other funds, including the Internet-flavored Wired Index fund, is ready for a
launch if and when it gets the all-clear on the ISDEX. (You can read more about this index at internet.com. Also see our
previous story on the Wired Index.) The firm has already filed a prospectus with the Securities and Exchange
Commission. And Jim Atkinson, director at Guinness Flight in Pasadena, Calif., says it would take less than two weeks to
launch the fund.
Other Internet index funds are on deck. When Barclays Global Investors launches its numerous exchange-traded index
products next year on the American Stock Exchange, one will track the Dow Jones Internet index. And E*Trade
(EGRP:Nasdaq) has said it is considering an Internet index fund.
I had heard about two other Internet index funds in registration, but getting any information on them was like finding pickled
pigs' feet at a New York deli. Internet 100 Advisors, an investment advisory firm in Arlington, Va., had filed to launch two
funds to track the firm's own Internet 100 index, according to a story on the Federal Filings wire in May. (One fund would
be market-cap-weighted like the underlying index, while the other would give all stocks equal weight.)
Fine. But I couldn't find a phone number for this firm. I couldn't find an SEC filing under its name. And this index doesn't
trade anywhere. One of my colleagues passed along a toll-free number that he found in some old notes. I called it and was
greeted by someone who sounded a lot like one of my kin people. I had reached The Nottingham Co. in Rocky Mount,
N.C., which provides administration and accounting services for mutual fund companies.
Frank "Kip" Meadows, managing principal at Nottingham, says Internet 100 Advisors may roll out the equally weighted
index fund first. Meadows says the SEC won't allow the firm to call them actual index funds because the underlying index is
not readily recognizable.
No manager is named in the filing. Meadows says he couldn't reveal the manager's name because that "gentleman is currently
working for another firm."
All this information still doesn't tell you whether you should invest in an Internet index fund if one is launched. Some will argue
that in such a narrow, volatile area of the market, an active manager could add value over an index.
But in theory, an Internet index fund could deliver the same type of benefits as the giant S&P 500 index funds, namely lower
fees and tax efficiency. It's too early to tell whether that will be the case as far as fees are concerned.
The annual expense ratio of the proposed Investec Guinness Flight fund, for example, would be capped at 1.35%, says
Atkinson. That's the same as the expense ratio for the actively managed Munder NetNet fund (which carries a front-end load
of 5.5%), though less than the 3.08% expense ratio for the actively managed Internet fund.
If you eventually consider investing in an Internet index fund, take a close look at the underlying index. Some are broader than
others, and the performance does vary. For 1999, for example, the 20-stock TheStreet.com Internet Sector index was up
39.9% through Friday, compared with 46.7% for the 40-stock Dow Jones Internet index and 35.5% for the 50-stock
Inter@ctive Week index.
One of the beauties of a broad, non-Internet index fund is the level of diversification you get. That's not so true for the
Internet variety. Remember with an Internet index fund, you will be investing in a very tight area of the market. When this
sector is in the Dumpster, actively managed and index funds alike will perform poorly.
Send your questions and comments, along with your full name, to deardagen@thestreet.com.
© 1999 TheStreet.com, All Rights Reserved.
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