Is the ETF Boomlet Over?

Barclays has prospered as the number of exchange-t

E xchange-traded funds (ETFs), those open-end index funds that can be bought and sold like equities on national stock exchanges, are the new darlings of Wall Street. With their intraday trading capability, low management costs, tax efficiency, and diversification, large brokerage firms are going hog-wild over them. Since April 2000, 42 new ETFs based on domestic indices have come to market. There are now 55 such funds available.

But such new-found stardom begs the question: Are ETFs too good to be true? Maybe. Concerns about liquidity, low trading volumes, and settlement issues are swirling around some Barclays Global Investors' ETFs, which trade under the iShares brand. "Some iShares don't trade that much, and there is a question as to whether they will," says one critic who requested anonymity. Barclays has been on an ETF rampage, rolling out 39 iShares funds in 2000. And as a relative newcomer to the mutual fund world, pundits question whether BGI's funds can hold their own against the fund veterans that are launching their own ETFs.

State Street Global Advisors launched nine new ETFs in 2000, and Vanguard plans to roll out its own ETFs, called VIPERS. But Garry Gastineau, managing director of ETFs for Nuveen Investments, which plans to launch a series of ETFs, wonders if the iShares can compete against the new entrants. "There will be a lot of competition and tight spreads."

ETFs have been around since 1993, but have recently seen an upsurge in interest. State Street launched nine sector-specific SPDRs in 1998. In 1999, the Nasdaq-100 Shares (QQQ, or "cubes") were launched on the American Stock Exchange. In December 2000, the iShares S&P Global 100 Exchange Trade Fund began trading on the Big Board. The NYSE expects to launch more of these funds in 2001, with a "homegrown" one set for roll out in the first quarter.

According to the American Stock Exchange, ETFs and HOLDRs, Merrill Lynch's version of the exchange-traded fund, held total assets of $61.19 billion at the end of October 2000.

Max Isaacman, an RIA at East/West Securities in San Francisco, says the reality that could become a problem with ETFs is in their creation and redemption process, which involves the interplay between the sponsoring institution, the specialist, and the market makers. Several experts say that such low trading volume in some of the iShares could signify lack of involvement by the specialist and the market maker. They say the specialist and market makers must be involved or it could result in a closed-end fund syndrome where the fund is selling at a discount, which is not how ETFs are designed.

J. Parsons, director of sales for Barclays Global Investors Services, a wholly owned subsidiary of Barclays Global Investors, says BGI is "pleased" with the trading activity in its ETFs. He says each of the 58 iShares will hit year-end 2000 sales targets. What critics aren't considering, Parsons says, is sectors that go in and out of favor. Take, for instance, the iShares Dow Jones Real Estate Index. He says it had a period of higher volume when interest rates went down, but volume decreased when rates rose. Although the Federal Reserve is expected to start lowering rates again, "real estate is not so hot now," Parsons concedes. And with ETFs, Parsons says, critics may be forgetting that the liquidity is based on the liquidity of the underlying securities.

In a report released in October, Salomon Smith Barney said that critics of ETFs aren't considering that "traditional means of measuring liquidity are not valid" for these instruments. The report says a few of these funds rarely trade. And at first glance, it appears as if any large trades would move the market dramatically in either direction, the report states. But Kevin McNally, a Salomon analyst, says that if you dig a little deeper, you'll find that the "bid-ask spread is relatively narrow and that the size of the bid and the ask are significant." For instance, the iShares Dow Jones U.S. Chemical Index Fund, which was part of Salomon's snapshot study of ETFs, traded an average of 140 shares per day during the study. However it averaged a 25-cents-a-share spread and a consistent bid and ask of 25,000 shares each. "In theory, the liquidity of an ETF is equal to the liquidity of the underlying securities," the Salomon report says. "As long as the stocks within the portfolio can be bought and sold with ease, the specialist can meet any supply/demand requirements."

So is the proliferation of ETFs a good thing? Jacquelyn Meziani, director of global business development at Standard & Poor's Corporation, says it's too early to tell how many funds will be around for the long haul. But "the cream will rise to the top." Indeed, she adds that even more ETFs are on the way. Look for one tracking emerging markets before long. - Melanie Waddell


Putting It All Together

Some of the biggest players on Wall St. are making account aggregation software a reality. You should pay attention

Does account aggregation, the technology that allows folks to view all their financial data on one Web page, threaten independent advisors' livelihood? Or will it become an invaluable tool for planners to develop closer relationships with clients? That's what advisors have been asking themselves as a growing number of large banks and brokerage houses team up with aggregators like Yodlee.com and VerticalOne Corp. to get such applications up and running.

Merrill Lynch, for example, announced plans to unveil a version of the aggregation technology this year. That is keeping Craig Martin, president of Family Wealth Consulting Group in San Jose, California,

on edge. "As an independent, I have been left defenseless without this kind of product," Martin says. Integrating all of a

client's financial information - estate planning, broker and mutual fund reports, checking accounts, credit card statements, portfolio reporting - from various institutions on one Web page is a revolutionary service, he says. "Today, the clients don't understand they need it, but once they see [the technology], it will be standard. At that point my business is frozen. Maintaining my client base will be possible with established relationships, but drawing in new clients will be next to impossible."

Martin has thus invested in Finexa, a Foster City, California, software firm which

is bringing out an aggregation product called Syrius.

The Evensky Group, launched recently by Coral Gables, Florida-based Evensky, Brown & Katz, is linking with Fidelity Investments' Institutional Brokerage Group to provide its clients with consolidated reports called "dynamic net-worth statements." Fidelity is now contemplating partnering with Redwood City, California-based Yodlee.com. And Offitbank, the New York trust banking unit of Wachovia Corp., is among a consortium backing a company called Kinexus, which rolled out a highly secure aggregation product at year end.

Morgan Stanley Dean Witter, Citigroup, Wells Fargo, Chase Manhattan, and First Union are among other companies working on their own aggregators. - Melanie Waddell

Schwab Gets Serious about managed accounts

Charles Schwab lured Jeffrey P. Cusack away from Salomon Smith Barney last year to shake up its managed account program. Cusack's effort is beginning to show results.

In mid-December, Schwab Institutional formed Schwab Consulting Services

(SCS) to give advisors access to top money managers, research, due dili-gence, and a streamlined account-opening process - all at an extremely low price of around 1% of assets. To pull this off, Schwab teamed up with Callan Associates, a San Francisco-based investment consultant. Says Cusack: "We want to challenge the market."

Schwab began offering separate accounts two years ago through its Managed Account Connection program (MAC), but growth has been slow because MAC lacked some essential features. Cusack has laid out a plan to address that concern, however. When it begins operating in the second quarter, SCS will offer three tiers of service. The top tier will be a new, bundled offering which has yet to be named. The next tier will be a revamped version of MAC. The program will be rounded out with a broader supermarket-type offering.

Schwab's analysis shows that only 9% of the advisors it works with have separate account business with the firm. If it catches on, Cusack's program could increase that percentage dramatically. - Scott MacKillop


An Equitable Venture

AXA Financial and Grant Thornton will jointly offer financial advice to the accounting firm's entrepreneurial clients

In mid-November AXA Financial, part of the AXA Group, entered into a joint venture with the accounting, tax, and management consulting firm Grant Thornton LLP to create Grant Thornton Advisors. AXA and Grant Thornton each own 50% of the new entity.

Why join forces? Simple, really. Grant Thornton doesn't have financial advisor/planners, but they do have clients - lots of them - who need financial advice. As for AXA, the venture enhances distribution of the financial giant's products and services. "AXA Advisor sales associates are to a great degree not writing Grant Thornton partner clients," explains Geoffrey Radbill, COO of Grant Thornton Advisors. "This is distribution that if we weren't in a position to get, somebody else would."

Grant Thornton spokesperson John Koegel notes that his company has long served clients, who for the most part are successful and wealthy owners of middle-market, entrepreneurial companies, in three general areas: assurance and audit; tax planning and compliance services; and management consulting services. Having established a solid relationship with these business owners, Grant Thornton often guides them through an acquisition or divestiture only to be asked the question, "Can you help me with the proceeds?" In the past, Koegel explains, the company was forced to say no, and sometimes recommend outside financial planners. "Now we'll be able to say yes," Koegel notes.

As Radbill notes, many Grant Thornton clients consider their CPA as a trusted advisor, and leave it at that. "They are so tied up in running their business they don't have time to take the next step." For a client transitioning from a Grant Thornton partner to a Grant Thornton financial advisor, making this step will be easy, he says.

The advisors, says Koegel, will be experienced CFPs, and most will be hired from the "marketplace." In 1999, what is now called AXA Financial, Inc. sprang forth from its insurance roots in The Equitable Companies to become a major financial services provider, with assets under management (as of November) in excess of $400 billion. AXA Advisor boasts a growing force of more than 7,000 agents in the process of shedding their insurance skins to become full-service financial planners; more than 3,000 have already completed training. All new AXA Advisors hires will be just that - advisors.

Koegel says that the company has 46 offices and 3,000 employees, and that Grant Thornton Advisors will be rolled out into all of them, gradually, and over a three-year period.

The companies Grant Thornton clients own, or serve as senior managers, are established and often family-owned; many of their principals are expected to take advantage of the personal financial advice now available to them through Grant Thornton Advisors, whose capabilities, Koegel says, are greatly enhanced by its relationship with AXA Financial. AXA brings to the table "a broad range of brand-name insurance and investment products, including insurance products offered by Equitable Life and investments products offered by AXA Advisors," says Dom Esposito, chief executive officer of Grant Thornton in a prepared release. Grant Thornton Advisors, to be headed up by David H. Abramson, will be headquartered in the AXA Financial Center in New York. - Cort Smith

Capital Capers
In February 1999 - after much prodding by the banking and credit card industries - the Senate passed the Bankruptcy Reform Act (S.625), designed to encourage Chapter 13 restructurings by virtue of making it harder to file Chapter 7 bankruptcy. Thinking the bill still not tough enough, the Senate revisited the issue (it passed the House in October) and on December 7 the Senate approved by a 70-28 margin what has been called the most sweeping bankruptcy legislation since 1978. It may, however, be swept under the rug.

President Clinton, siding with opponents who charge the bill in its current form would harm working families down on their luck due to illness, job loss or divorce, has threatened to veto the measure. Proponents argue that the bill is necessary to curb the rising number of bankruptcies, which in 1998 reached a record 1.4 million.

Apart from such actions as placing limits on repeat bankruptcy filings, the bill applies a new standard for determining whether persons filing for bankruptcy should be forced to repay their debts under a court-approved reorganization plan rather than having them dissolved.

At press time the bill remained unsigned on President Clinton's desk - where many lawmakers expected it to die. With Congress in recess, the bill would fall victim to a presidential "pocket veto"; with Congress in session, there would be a chance that some Democrats might join in helping to override a presidential veto. Barring a pocket veto, the president would be forced to veto the bill to prevent it from becoming law.

Senator Charles Grassley (R-Iowa) has urged Clinton to sign the bill, warning that with a Republican president in office - who, at long last, will be George W. Bush - many of the bill's provisions cherished by Democrats may be lost if the new Congress revisits the issue.

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