Semi-Active Fund Breaks New Ground
October 9, 2000
Of the ten new streetTRACKS exchange-traded funds introduced this month, one in particular has caught the fund industry's attention for its ground-breaking nature.
The streetTRACKS Morgan Stanley Internet Index Fund from State Street Global Advisors of San Francisco will operate slightly differently than other exchange-traded funds because of the underlying index on which it is based, fund executives and analysts said. While it is not an actively-managed exchange-traded fund, a product that has yet to be invented, it is a significant step in that direction, analysts said.
Unlike the 69 other exchange-traded funds on the market, this fund is based on a proprietary Morgan Stanley index of only 29 stocks that will be re-balanced quarterly, said Kristopher Heck, an analyst with Wiesenberger/Thomson Financial of Rockville, Md.
The streetTRACKS Morgan Stanley Internet Index Fund is also different in that the index covers the highly volatile Internet sector and is managed by Mary Meeker, a prominent Wall Street analyst, Heck said.
Meeker has been rated the number-one analyst of Internet stocks by Institutional Investor, said Diane Garnick, an exchange-traded fund analyst with Merrill Lynch of New York.
Meeker was not available for comment and Morgan Stanley declined to comment for this story. A source at Morgan Stanley said only that the Morgan Stanley Internet Index, which was created on March 24, will be re-balanced every quarter on the third Friday of March, June, September and December.
The index will be changed to reflect the rapid change inherent in the Internet sector, Meeker said at a news conference at the American Stock Exchange Sept. 29, when seven of the streetTRACKS began trading there.
The prospectus and sales literature that Morgan Stanley and State Street have released about the streetTRACKS Morgan Stanley Internet Index Fund suggest that Meeker is really controlling this index so it is almost like an actively-managed exchange-traded fund, Heck said.
"The key difference between the indices of all of the other ETFs - the S&P 500, the Nasdaq and the Dow Jones Industrial - is that those indices are compiled by index providers, such as Standard & Poors and Frank Russell," Garnick said. "The people that select the companies that get added to the index tend to be theorists, such as economists." But, some of the specialized country exchange-traded-funds and the Morgan Stanley Internet Index Fund will be based on indexes that are, "selected by fundamental analysts who have a better handle on the prospects of the companies," Garnick said.
"Because [the streetTRACKS Morgan Stanley Internet Index Fund] will be a highly volatile ETF . . . there will be more active management," said Edgar Cha, an analyst with Strategic Insight, a research firm in New York.
Other exchange-traded funds based on indexes of hundreds of stocks pick randomly from those indexes to achieve a "representative sampling," Cha said.
"But because this will be based only on 29 stocks of a rapidly-changing sector, this is more of an enhanced index," Cha said. "And an enhanced index is a step towards an actively-managed fund."
Nathan Most, the inventor of the first exchange-traded fund, the SPDR, based on the Standard & Poor's 500 Index, also said the new streetTRACKS fund was a new direction for exchange-traded funds. But, Most said he even viewed the SPDR as "a managed fund" since the S&P 500 index is altered every quarter. Most is now an executive with Barclays, working on the company's iShares products.
Meeker and her staff at Morgan Stanley will take a more active approach to their basket of only 29 stocks than economists who normally run indexes would, the Morgan Stanley source said.
If even a few of the stocks or weightings of stocks in that basket are changed every quarter, the impact will be greater than in the larger universe of a large index, Heck said.