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Barclays Times it Right With Bond ETFs


The debut of Barclays Global Investors' (BGI) bond exchange-traded funds (ETF) could not have been better timed.

Although many firms maintain that they develop products based on what will be best for investors, even fund companies tend to chase performance, and many end up introducing funds at the tail end of a hot phase. Merrill Lynch of New York would probably like to have launched its Internet Strategies Fund a little sooner than March 2000.

Barclays of London, which began planning its four new fixed-income ETFs in 2000, seems to have lucked out by finally getting Securities and Exchange Commission approval in the middle of a very hot bond market. After bond funds experienced net outflows of more than $50 billion in 1999 and 2000 combined, they have drawn in nearly $146 billion since the beginning of 2001, according to the Investment Company Institute.

"Clearly, not too long ago a bond strategy was not a sexy thing to do. We got lucky with the timing," said Kerry Steele, a spokeswoman for BGI, noting that the registration period took 18 months. The funds "happened to come out at a time when people are really looking at bond investments," she said.

Indeed, the four fixed-income iShares garnered roughly $3 billion in external assets in the first two weeks after their July 26 launch date, according to the firm. Three of the new ETFs are based on Lehman Brothers' indexes. The fourth, based on a Goldman Sachs bond index, is already the eighth-largest ETF, with more than $1 billion in assets under management, according to the American Stock Exchange, on which the iShares are listed.

"They had total luck with the long delay in SEC approval, so they came out in a hot bond market," said Donald Cassidy, a senior analyst at fund research firm Lipper of New York. "There is roughly $37 billion in bond index funds out there, so the $3 billion is [equivalent to] about 8% of that, which is good. We'll see if it grows from there."

In a recent report, Cassidy called early ETF asset predictions "wildly high" and maintained that with ETFs based on the same indexes competing for assets and liquidity, their growth would be hampered by overcrowding in the marketplace. However, he also mentioned that bond ETFs, and perhaps eventually actively managed ETFs, could re-ignite their growth. Since the SEC approved fixed-income ETFs, there are now a whole host of fixed-income indexes for ETF sponsors to build products on, Cassidy said, and other firms are likely to come out with competing products.

ETF Popularity Defies Market

Equity ETFs have actually fared well of late, despite market conditions. Although $54 billion in net flows went into equity funds through June of this year, the market's decline has decreased equity fund assets from $3.42 trillion to $3.01 trillion, according to the ICI. On the other hand, because investors put comparatively more into ETFs, $22.3 billion, ETF assets have risen from $83 billion to $89 billion.

Positioning the ETFs as an easier way for financial advisers to implement bond strategies and react to market changes since they can be traded midday, BGI is advertising the products in several publications, including Barron's and Investor Business Daily. The company has also sent out a direct mailing and e-mail blast to financial advisers and has updated its Web site to incorporate fixed-income ETFs into adviser tools. As well, BGI conducted an eight-city road show for index participants and financial advisers.

Targeting Financial Advisers

While BGI does not want to ignore retail investors, financial advisers are clearly its primary focus. According to Steele, its ETF business is split nearly 50/50 between financial advisers and large institutions. Not only is retail investors' use of ETFs very difficult to track, Steele said, but more and more are turning to financial advisers.

In fact, because retail investors have had so little exposure to ETFs, it is much more likely that an adviser will tell a client about them than it is for a client to ask for them. According to a study commissioned by the Amex and conducted by Harris Interactive in 2001, only 17% of investors have ever owned ETFs. By comparison, 94% of investors have owned mutual funds, 76% bonds and 51% index funds. Even when educated about ETFs, only 7% of investors said they were "extremely" likely to purchase them.

Steele would not comment on BGI's iShares marketing budget but said the firm is working on a new overall ad campaign for the fall.

However, BGI was not the first to file for the products. Nuveen Investments applied for bond ETFs before BGI did, according to Gary Gastineau, who served as head of new product development at the Amex before joining Nuveen. However, in the middle of the SEC hold up, Nuveen decided it did not want to proceed with the products.

Gastineau left the firm to launch the products through a new venture, ETF Advisors, with Nuveen retaining a small interest. Gastineau said he expects his four fixed income ETFs, based on Ryan indexes, to be approved soon.