From the July 2006 issue of Research Magazine • Subscribe!

July 1, 2006

Dividends, Sub Sectors and Equal Weights Added

In April, First Trust Advisors and the Nasdaq Stock Market announced the launch of two ETFs: an equal weight version of the Nasdaq-100 (QQEW) and the Nasdaq-100 Technology index (QTEC). Both funds have an expense ratio of 0.60 percent and trade on the Nasdaq Exchange.

"This collaboration with First Trust is indicative of our commitment to offer investors products that help them reach their investment objectives," explains John Jacobs, executive vice president of the Nasdaq.

Elsewhere in the ETF arena, Vanguard added to its growing roster of VIPERs with the debut of the Dividend Appreciation Index Fund (VIG). It will carry an expense ratio of 0.28 percent, making it the cheapest of all dividend-oriented ETFs.

"We are committed to expanding our suite of ETFs to include broad market, style, sector and specialty funds with costs that are considerably lower than many competing products," explained Vanguard Chief Investment Officer Gus Sauter. Vanguard's ETF assets grew by more than 92 percent in 2005 and now sit at $15 billion.

Vanguard also filed a registration statement with the Securities and Exchange Commission for two mid-cap index funds that will each have a VIPER ETF share class. They'll be known as the Vanguard Mid-Cap Value and Mid-Cap Index funds.

Barclays Global Investors, proprietor of the iShares, introduced 10 sub-sector ETFs in May. The funds track 10 Dow Jones mini-sectors and are listed on the New York Stock Exchange. Barclays already manages over $16 billion in sector ETFs alone; this latest crop of funds promises to deliver concentrated exposure to a handful of stocks in narrow industry sectors. As of mid-May, the iShares Dow Jones U.S. Broker/Dealers (IAI) held only 24 securities in its portfolio, whereas broader financial indices such as the SPDRs Financials (XLF) had 86 holdings.

Home construction, medical devices and regional banks are among the industry groups that the new sub-sector funds track. All have expense ratios of 0.48 percent and are rebalanced quarterly.

Commenting on the launch, Lee Kranefuss, CEO of Barclays' ETF business, said, "Due to the Dow Jones series being market-cap weighted, many investors have asked us for a way to provide sub-sector exposure in situations were the broader sector is dominated by large-cap names." The attraction of narrow sectors might have to do with the fact that many sector indices are dominated by only a handful of large stocks. As a result, it makes the influence of smaller and innovative companies on index performance negligible.

Barclay's Sub-Sector ETFs

iShares Dow Jones U.S. Oil & Gas Exploration/Production (IEO)

iShares Dow Jones U.S. Oil Equipment & Services (IEZ)

iShares Dow Jones U.S. Pharmaceuticals (IHE)

iShares Dow Jones U. S. Healthcare Providers (IHF)

iShares Dow Jones U.S. Medical Devices (IHI)

iShares Dow Jones U.S. Broker/Dealers (IAI)

iShares Dow Jones U.S. Insurance (IAK)

iShares Dow Jones U.S. Regional Banks (IAT)

iShares Dow Jones U.S. Aerospace & Defense (ITA)

iShares Dow Jones U.S. Home Construction (ITB)

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RON DELEGGE is the editor of www.etfguide.com.

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