April 24, 2000
NEW YORK - Even though exchange-traded funds are among the largest 10 index funds in each major asset class and make up 10 percent of all index funds, fund companies are wary of offering the product, according to one industry executive.
Companies may be hesitant to offer them because of the extensive regulatory requirements that can delay their development, said Deborah Fuhr, vice president and head of global marketing for Morgan Stanley Dean Witter. They are also still relatively new products and are not closely tracked by the fund industry, she said.
"Most groups are taking a wait and see approach," Fuhr said.
Fuhr made her remarks at a conference on electronic distribution of mutual funds held here recently and sponsored by International Business Communications of Westborough, Mass.
Vanguard Funds of Malvern, Pa., known for its index funds, has chosen not to offer exchange-traded funds because it does not want to attract the kind of investor that is usually interested in these funds, said Brian Mattes, a spokesperson for the company.
"The primary reason for looking at including an exchange-traded fund would be to draw out market timers from our index funds," he said. But, the company has given the funds serious consideration and has not rule them out.
The three largest players in exchange-traded funds are State Street Global Advisors of Boston, Barclay Global Investors of San Francisco and John Nuveen of Chicago.
SSgA will launch eight new exchange-traded funds in the next few weeks and Barclays already has 51 exchange-traded funds, Fuhr said.
Nuveen does not currently offer exchange-traded funds, but it recently hired Gary Gastineau, who developed one of the first exchange-traded funds while at the American Stock Exchange where he was the senior vice president of new product development. Gastineau will be in charge of adding an equity-based exchange-traded fund to complement Nuveen's line-up of closed-end municipal bond funds.
Nuveen wants to offer exchange-traded funds because of their popularity with investors, said Bradford Shaw, vice president and manager of exchange-traded funds for Nuveen.
"Why somebody like Fidelity or Vanguard doesn't have this product I can't answer," he said. "We choose to think this will have tremendous appeal to investors. Does this create more volatility? One may say that, but it also creates tremendous amounts of liquidity. It's part of investing now and I personally believe it will be there in the future."
Nuveen will introdue its first exchange-traded fund in the near future, he said. He declined to be more specific.
"We have a lot of things in the hopper and you have to go through the regulatory outline as far as bringing a product to market," he said. "We have hired Gary Gastineau to create an exchange-traded fund product that will be a passively-managed portfolio of equities that tracks the performance of an index."
That passive management style may explain why more fund companies have not warmed to exchange-traded funds, said Kurt Brouwer, co-founder of Brouwer & Janachowski, an investment advisory firm of Tiburon, Calif. Because it is passively managed, an exchange-traded fund does not have ongoing management fees fund companies can collect, he said. Concerns about market timing are another issue, he said.
"Funds have discouraged market timers from index products because it's a pain to put up with and it dilutes actual performance of the fund," he said.
The popularity of exchange-traded funds will continue to grow, said Fuhr of Morgan Stanley Dean Witter. Currently, the funds have nearly $39 billion in assets under management and she predicts that assets will grow to $150 billion by the end of the year. Fuhr cites the number of new products emerging as evidence of the product's popularity and continued success.
More retail investors are beginning to invest in them because of new product developments, she said.
"They try to structure them so people will understand them and they are simple to use," she said.