The ETF business wasn’t always this fun. And the people at Barclays Global Investors (BGI), sponsor of the iShares, can attest to it. In 1996, when few investors were aware of ETFs, the company banked on their future by quietly launching a series of single country funds. Even though the early years were spent doing a lot of explaining, BGI’s hunch eventually paid off as their ETFs zoomed from obscurity to stardom.
BGI’s early commitment to ETFs that touch international markets has paid off handsomely. Today, the iShares MSCI EAFE index accounts for some $22
billion in assets, making it second in size to the venerable SPDRs, which track the S&P 500. All together, BGI had 102 ETFs with almost $171 billion in assets ending
December 31, 2005. It continues to lead the U.S. market in terms of both the number of ETFs offered and assets.
Realizing their influence, the company has targeted financial advisors in its marketing efforts over the past few years. The iShares website has won the praise of many advisors for its asset allocation tools and other convenient features. Nevertheless, BGI has not quit in its pursuit of reaching the retail masses. Josh Taylor of Kompass Financial in Englewood, Colo., thinks that BGI has done a good job of educating investors. Referring to the iShares print materials he states,
“It provides good basic information for the consumer to learn about this concept in investing. It helps my clients to have an understanding of what their money is invested in.”
Let’s look at the key asset categories that the iShares funds cover:
Broad Market Indexes
The broad market ETFs offer an excellent starting point for constructing investment portfolios. They typically offer unconfined exposure to stocks in all asset categories, including large-cap, mid-cap, small-cap and micro-cap. With one simple trade, instant diversification is easily attained.
The iShares offer six ETFs in the broad market category. The NYSE composite, for example, covers all common stocks, ADRs and REITs listed on the New York Stock Exchange. For those that want an even broader span, there are three versions of the Russell 3000 index, with value, growth or blended approaches. Russell broad indexes are composed of stocks in all capitalization categories.
In the landscape of domestic indexes, there are plenty of iShares to choose from. In the large-cap category, the iShares S&P 500 (Amex: IVV) is the fourth largest ETF, with just over $14 billion. In the mid- and small-cap categories, iShares track indexes by Morningstar, Russell, and Standard & Poor’s.
One area that ETFs were lacking was exposure to micro-cap stocks. The iShares Russell Microcap (NYSE: IWC) filled that void in 2005. The index includes 1,000 of the smallest stocks within the small-cap Russell 2000, plus it scans an additional 1,000 outside companies in the micro-cap universe. Financial services, health care, and technology collectively represent almost 60 percent of the sector
exposure in this index.
Industry & Sector Indexes
For sector investors, iShares offer 21 ETFs that follow industry indexes ranging from basic materials to technology. Dow Jones and Goldman Sachs provide most of the indexes, while Cohen & Steers provides exposure to its Realty Majors REIT index (NYSE: ICF).
Three of the Goldman Sachs technology indexes offer concentrated exposure within this sector. The iShares Goldman Sachs Networking (Amex: IGN), iShares Goldman Sachs Semiconductor (Amex: IGW) and the iShares Goldman Sachs Software (Amex: IGV) each slice and dice this sector into niche areas. Some investors have been attracted to the high options premiums of these ETFs, because of their volatility.
Single Country Indexes
No other fund company has more individual country ETFs. Many of these funds were launched in 1996, making them among the oldest ETFs. The iShares MSCI Japan (EWJ) with $13.08 billion in assets is the largest single country fund. Other funds that have had a surge in assets are the iShares MSCI South Korea ($1.38 billion) and Brazil indexes ($1.22 billion). Both were among the best performing country funds in 2005.
“If you have a lot of conviction, single country funds can work. For example, Canada could be considered a natural resources play, whereas Taiwan is a good way to have exposure to the semiconductor sector,” says Jane Husband, Vice President of Main Management in San Francisco.