E*Trade has finally received SEC approval for its first mutual fund and has now started its own asset management business.

It is an important step by the online brokerage not only for its own business but also for the new territory it is covering. It has created the first mutual fund that will use the Internet as its sole channel for distribution and compliance. The fund first became available to investors on Feb. 17.

This model is designed to keep expenses low. The first E*Trade fund, the E*Trade S&P 500 Index Fund, will charge 32 basis points. All trading of the fund must be done online and investors must receive all their shareholder communications, including shareholder reports and prospectus updates, through e-mail. Shareholders are required to have a working e-mail address.

When E*Trade has to send out compliance documents, investors will receive an e-mail notifying them that the document is available. They will then receive another e-mail which will include a hotlink to the website and the appropriate electronic document. Alternatively, the documents can be retrieved right off the website (www.etrade.com). Investors have no choice. Those who buy shares of the E*Trade Funds must agree to receive all correspondence by electronic mail.

This arrangement is expected to cut down on mailing and printing costs and the costs associated with trading done over the phone. However, the cost of investing in the fund, which is sub-advised by Barclays Global Fund Advisors, is still nearly twice that of Vanguard's S&P 500 Index Fund. That fund, the Vanguard 500 Index Fund, charges 18 basis points but has a minimum of $3,000 and a $10 annual maintenance fee. The E*Trade fund's minimum is only $1,000 and it has no maintenance fee. Investors in the fund must open an E*Trade brokerage account before they buy the E*Trade Funds. The minimum for opening a brokerage account is $1,000 and the minimum can all be invested in the fund. Investors who redeem shares within four months will be charged $25, however.

E*Trade and its money management arm, E*Trade Asset Management, have plans for more products that will be delivered online. These include other index and enhanced index funds- index funds aimed at beating the index- and fund-of-funds that will invest in products from other fund companies. E*Trade has not discussed details of these products. It has said only that they will be launched some time in 1999 or 2000.

E*Trade is not sure how it will create an inexpensive fund-of-funds, but the company is working on it, said Brian Murray, vice president, group manager for the mutual fund group at E*Trade. Murray also said that a variety of sub-advisers besides Barclays will most likely be used for the new funds.

While investors must use the Internet to buy or sell shares of the E*Trade Funds (non-proprietary funds bought through E*Trade's mutual fund center can be traded on the phone or online), phones can be used for customer service, Murray said. E*Trade does place heavy emphasis on its online customer service center called E*Station. However, there is an 800 number that investors can call.

"Customer service is very, very important to us," said Murray.

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