From the October 2008 issue of Research Magazine • Subscribe!

Go Global

The 19th-century American catch phrase "Go West, young man" is attributed to New York newspaper editor Horace Greeley, who used it in an 1865 editorial. While Greeley is no longer around, an updated version of what he said might be in order. Today, his popular expression might read more along the lines of, "Go Global, young man!"

One place that readily illustrates this global-minded perspective is the exchange-traded fund (ETF) marketplace.

International ETFs hold in the vicinity of $140 billion in assets, which is roughly one-quarter of the entire U.S. ETF market. Of this group, funds that focus on individual countries have become popular choices. Such funds allow investors to exclude undesirable markets by concentrating their holdings in specific regions or countries.

During the spring of this year, Northern Trust began rolling out a suite of ETFs focused on global equity markets. As of mid-August the firm managed 15 distinct funds concentrated in a broad array of countries.

Here to discuss these funds is Peter K. Ewing, senior vice president and managing director of the ETF Group at Northern Trust Global Investments.

Research: Northern Trust Global Investments recently entered the U.S. ETF marketplace. Tell us about your company's ETF lineup.Ewing: The NETS Single-Market Series seeks to offer ETF-based exposure to the world's most relevant equities markets using the world's best recognized benchmarks. The NETS product suite reflects Northern Trust's commitment to (1) time-tested principles of sound portfolio construction and asset classifications and (2) clear-sighted innovation in service of these principles.

Virtually all of the benchmarks that define our product offerings benefit from wide-scale acceptance by capital-market experts, asset managers and securities traders around the world. This fact is evident from the vast amount of investment capital that is tied to these benchmarks through commingled investment vehicles, exchange-traded derivatives and large books of over-the-counter derivatives in the local markets for these benchmarks and elsewhere in the world.

Northern Trust believes that the depth and breadth of the acceptance of these benchmarks yield a number of important benefits, including increased liquidity for the underlying portfolio holdings, hedging and arbitrage trading strategies and informatics that can be used to inform investment and risk management processes. For example, the fact that the majority of trading desks at asset management firms and hedge funds around the world constantly follow the intraday performance of, say, Hang Seng, FTSE 100, S&P/ASX and DAX contributes to the informational significance of these benchmarks and to the information or analysis that is routinely developed about them. If investors construct non-U.S. equities portfolios around these benchmarks, they can benefit from this information as they make investment and risk-management decisions.

In terms of assets, which Northern Trust ETFs have enjoyed the most investor interest?In the short period of time that the NETS family of ETFs has been available, we have seen ready and broad acknowledgement of the merits of the overall NETS suite among registered investment advisor, hedge funds and other institutional traders, select pension funds and sophisticated self-directed investors. Frankly, the suite itself has generated more interest as a group than has any single NETS ETF, viewed in isolation from other NETS ETFs. But we have recently seen signs of particular interest in NETS Hang Seng Index Fund (Hong Kong), NETS S&P/ASX 200 Index Fund (Australia), NETS Hang Seng China Enterprises Index Fund (China) and NETS TA-25 Index Fund (Israel).

Why is investing with a global perspective a crucial component of a successful long-term investment plan?For decades, one of the most important principles of portfolio construction has been diversification. And many investment professionals believe that allocations to individual equities markets around the world help diversify investment portfolios and can improve the risk properties of a portfolio. NETS Single-Market ETFs offer exposure to many such markets around the world so that investors (or the financial professionals who advise them) may select allocations to specific markets in whatever amounts they deem appropriate in light of their respective investment objectives and risk tolerances. NETS simply help extend the set of investment solutions that U.S. investors have at their fingertips by making global markets available in local U.S. time.

The iShares country funds follow MSCI indexes, whereas Northern Trust's ETFs follow indexes constructed by a number of different index providers. How would you contrast the two strategies?The MSCI family of single-country indexes derive from MSCI's application of a uniform index methodology to data deemed to be relevant by MSCI in accordance with its methodological preferences. Many investors are convinced that a premium should be placed on uniformity over other index attributes and are thus pleased to adopt the MSCI series of single-country indexes for investment or other purposes.

By contrast, the benchmarks that form the basis of the NETS Single-Market Series of ETFs are issued by an array of exchanges, banks, publishing firms and other organizations operating in situ in these markets. The design of the indexes that form the basis of the NETS Single-Market Series vary in accordance with (a) the methodological preferences expressed by these local organizations, (b) the information that they deem to be relevant in light of the particulars characterizing those markets and (c) with what each such organization deems to be most representative and effective.

Investors in the U.S. and elsewhere do not typically invest in MSCI USA. Just as investment professionals around the world have accepted the S&P 500 or Russell 2000 as representative of the U.S. equities markets, they have also accepted the FTSE 100 as representative of the U.K. markets, CAC40 as representative of the French market, the ISEQ 20 as representative of Ireland and so forth. Again, this fact is evident from the amount of investment capital that is linked to the performance of the array of benchmarks that are tracked by NETS.

Because of the steep decline in the value of the U.S. dollar, a lot more investors have become keen on obtaining currency diversification. Aren't investors able to get this by owning Northern Trust's foreign ETFs?None of the NETS Single-Market products seeks to hedge fluctuations in the exchange rates between the U.S. dollar and the local or base currency. As a result, each NETS Single-Market product provides investment exposure to both a pool of non-U.S. equities and to the base or local currencies.

What's the difference between stocks inside your China ETF (SNO) vs. equities from the Hong Kong fund (HKG)? How are they different?The NETS Hang Seng China Enterprises Index Fund (China) has a ticker symbol of SNO and offers investment exposure to constituents named in the Hang Seng China Enterprises Index. The constituents of this index are securities that are issued by companies located in China and that trade as "H Shares" on the Stock Exchange of Hong Kong.

The NETS Hang Seng Index Fund (Hong Kong) has a ticker symbol of "HKG" and is tied to the Hang Seng Index. This index includes securities that are traded primarily on the Stock Exchange of Hong Kong.

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Ron DeLegge is the San Diego-based editor of www.etfguide.com.

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