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Three Funds Launch Off Lipper's Target-Risk Indexes of ETFs

Relying on the brand recognition of the Lipper name, the cache of exchange-traded funds, and the buzz around target-risk investing, Parsippany, N.J.-based Hennion & Walsh Asset Management is hoping to attract attention, flows and perhaps some space on 401(k) platforms.

The $170 million money manager announced last week three new funds of indexes of ETFs, all based on target-risk indexes comprised of ETFs created by Lipper. Hennion & Walsh's three funds are the SmartGrowth Lipper Optimal Conservative Fund, the Optimal Moderate Fund and the Optimal Growth Fund.

"The ETF marketplace is almost too crowded," said Bill Walsh, president and co-founder of the firm. "We find it confusing-confusing for advisers and confusing for our clients," he said. But one thing is missing, he said: a product that helps streamline the clutter.

The Lipper indexes, which both companies believe to be the first of their kind, are meant to help streamline the picking process for investors, by organizing indexes around risk tolerance. These "investible indexes" also mark a new line of business for Lipper, which has created passive indexes for more than two decades, will now compete with companies like Standard & Poor's, whose S&P 500 Index was the basis of the early SPYDR ETFs.

Lipper started from a universe of 500 ETF products last summer, and after filtering through the mass for performance, liquidity and exposure, whittled the list down to 23.

Despite the all-equity mix, the conservative index mimics a balanced fund with 60% equity and 40% bond, he said. And just because the portfolios are equity now, doesn't mean they always will be. Lipper will rebalance the indexes, and with the continued proliferation of new ETFs, that could change, with some bond or commodity products nudging their ways into the lineup, said Andrew Clark, head of research for The Americas at Lipper and architect of the indexes.

"You just have to know what to pick," Clark said.

That is where Lipper's expertise, and powerful brand, come in, said Gary Gastineau, principal at ETF Consultants in Summit, N.J. "This sort of active management of an index is a common and very marketable notion. The idea that Lipper is evaluating the funds will play well."

Each fund has between three and seven ETFs, Clark said, but investors' exposure is much wider. For example, while the most concentrated ETF includes only 40 holdings, the broadest has 755. The funds are built with no overlapping securities.

By packaging these ETFs in a mutual fund structure, not only can the SmartGrowth products be sold by advisers to clients looking for satellite holdings to add a growth element to, for example, a fixed-income portfolio, but they are also positioned to fit into qualified retirement plans. Once the funds have attracted enough assets, and established substantial enough of a record, the plan is to get onto 401(k) and other platforms. The firm aims to introduce institutional class shares within 12 months. As target risk funds, they could also become the default investment option for employers looking for low cost and diversity, in accordance with provisions of the 2006 Pension Protection Act.

Not everyone is convinced of the funds' premise. "It sounds like too many Ph.Ds sitting in cork-lined rooms trying to capitalize on ETFs and the interest in asset allocation funds," said Burton J. Greenwald, of B.J. Greenwald Associates in Philadelphia. "What you are talking about is a very complex structure not easily understood by investors," he said.

Furthermore, the funds' 1.5% expense ratios erode the low costs for which ETFs are famous.

Companies like Seligman and XTF Advisors already offer mutual funds of ETFs, and although the underlying holdings of the Hennion & Walsh funds are different, that nuance will likely be lost on many investors and advisers alike, Greenwald said.

The SmartGrowth funds are based on three of five indexes rolled out by Lipper in January. All five are ETF based, and risk-oriented. Hennion & Walsh elected the middle three, leaving behind a very conservative and very aggressive option. Those may be up for grabs by another asset management company, or perhaps sold piecemeal in another way, Clark said.

While the destiny of those indexes is unclear, there is no doubt Lipper will unveil new indexes in the future, he said.

When entering the business of investible indexes, ETFs are a smart place to start, Gastineau said. First of all, ETFs account for as much as 90% of index publishers' revenue, he estimated. "Take the expense ratio of an average fund, and the index fee is between 12% and 15%, on average," he said.

Lipper is not the first rating company to offer products. S&P, after all, has been involved in ETFs since the inception, and has been in the investible index business for years, while Chicago-based Morningstar offers selection services to money managers.

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