A piece on "etf's"...
Big U.S. investors increasingly rely on ETFs
Reuters, 03.23.04, 2:00 PM ET
By Cal Mankowski
NEW YORK, March 23 (Reuters) - Big U.S. investors such as pension funds and hedge funds are increasingly making exchange-traded funds part of their strategies, drawn in by the securities' low cost and high liquidity.
"There's been an evolution in the ETFs," said Larry Peruzzi, senior equity trader at The Boston Company Asset Management LLC, part of Mellon Financial Corp. (nyse: MEL - news - people).
ETFs are baskets of stocks or other securities that trade on exchanges like individual stocks. Peruzzi said that originally the ETFs were seen as a way for a manager to quickly put a chunk of money that came into the fund to work. Now, managers use them to move money between different types of assets and capture spreads.
Deutsche Bank Securities, a major player in ETF trading, estimates that recent volume in U.S. registered ETFs has averaged about $11.8 billion a day. That compares to the average daily volume in dollars of $46.3 billion on the New York Stock Exchange during February.
Nizam Hamid, global head of portfolio and index research at Deutsche Bank Securities in London, estimates that 60 percent to 70 percent of the business is done by institutional investors including hedge funds.
The American Stock Exchange, a pioneer in ETFs, is home to about 140 ETFs. Average daily consolidated volume in the Nasdaq 100 Trust <QQQ.A> this year through the end of February was 89.6 million shares. Average daily consolidated volume in the Standard & Poor's Depositary Receipts (SPDR) <SPY.A>, the flagship ETF product launched just over 10 years ago, was 36.5 million shares.
The Nasdaq 100 and SPDR volumes are not up dramatically from a year ago, but traders say other ETFs such as the iShares MSCI Japan <EWJ.A> and the iShares Russell 2000 <IWM.A> have been very active.
Big investors use trading houses such as Deutsche Bank Securities. Kelleigh Faldi, head ETF trader at Deutsche in New York, estimates that five or six firms account for 60 percent of the business.
STRATEGIES
Peruzzi said one way that a big fund might use the ETFs is to lock in certain gains near the end of the year.
If an active manager's stock picks have worked well and he is ahead of his benchmark index, he can sell his stocks and put the money into the ETF that corresponds to the benchmark. The move guarantees that he will beat the benchmark for the year, an accomplishment that makes a strong impression on clients in the very competitive world of professional money management.
Once the new year begins, the manager will want to get out of the ETF and buy a portfolio of stocks.
In another strategy, managers could buy one or more stocks they like in an industry sector that they consider to be unattractive. By shorting the ETF that represents the industry, the manager captures a spread and creates a gain.
Assets of U.S. ETFs totaled $151 billion at the end of 2003, up from $102 billion a year earlier. The increase reflected the rising stock market in 2003 and net issuance of new ETF shares.
About $12.2 billion went into exchange-traded stock funds through net issuance of new shares in December 2003, according to the Investment Company Institute, the mutual fund industry's lobbyist. Net issuance of stock ETFs declined to $1.5 billion in January.
Some of the money going into ETFs may be due to investors establishing short positions that would benefit from a decline in the market.
Exchange-traded funds are readily available to individual investors. Companies like Barclays Global Investors issue ETFs based on various industry sectors and specific countries or geographic regions.
Barclays recently announced plans for the Morningstar iShares ETFs, which are based on the nine investment "style boxes" used by fund tracker Morningstar Inc.
At the end of January, the Vanguard Group, known for its index mutual funds, added an exchange-traded class of shares to 14 of its funds. The exchange-traded versions, know as VIPERS, are available on nearly all of the firm's index fund products.
Some critics say individuals may be better off buying a traditional index fund directly from a no-load mutual fund company. ETFs must be bought through a broker, which involves a commission.
ETF proponents say if they are purchased through a discount broker the commission is not a big deterrent. |
