The Internet brokerage E*Trade has launched its own mutual fund family and in the process has created what may be the first mutual fund to offer so-called electronic shares.

Investors in the new fund, the E*Trade S&P 500 Index Fund, to be available early in 1999, must receive all their information about the fund electronically. The savings from that arrangement are expected to translate into lower fees. The fund fees are expected to be even lower than for other index funds which typically have low advisory fees because they are passively managed.

The fund, part of the new E*Trade Funds family, will be the first foray into mutual fund management for E*Trade which just recently revamped its website and brokerage services. The company also created an investment adviser called E*Trade Asset Management although the new index fund will be sub-advised by Barclays Global Fund Advisors.

Some mutual fund companies, including American Century Investments, have considered creating electronic shares for their mutual funds. But E*Trade has been the first to introduce such a product. American Century is still considering electronic shares but has not decided whether to offer them, according to an American Century spokesperson.

Lee Gremillion, a partner with Price Waterhouse, has been advocating the creation of low fee electronic shares as compensation to customers who accept electronic mailings. Many companies are trying to get their shareholders to receive all their mailings electronically, but are not giving the shareholder anything in return, he says.

Gremillion says the potential market for electronic shares is small and that they will obviously only appeal to investors who buy mutual funds directly. They will not appeal to those who go through a broker or those who are loyal to certain fund companies, he said.

"I think it's a good thing," Gremillion said. But, he said convenience is far from the only criteria investors use in deciding what mutual funds to buy.

Gremillion does believe though that E*Trade's product might eventually pull investors out of other similar funds that do not offer a break for doing business electronically.

For E*Trade, the new proprietary fund should help boost its image among mutual fund investors. And while E*Trade does not have established ties to investment managers as Discover Brokerage (Dean Witter Morgan Stanley) and DLJJdirect (DLJ Asset Management) do, its new agreement with Barclays Global Fund Advisors should mitigate this handicap. The adviser's parent is Barclays Global Investors, an institutional money manager with $500 billion in assets under management that is known for its expertise in indexing.

"The introduction of asset management is a logical extension of our business line," said Brian Murray, vice president and general manager of E*Trade's mutual fund group, in a statement.

Several of the top Internet brokerages have launched their own mutual funds - mostly index funds. Schwab has its own line of funds, including index funds, and Waterhouse offers its customers the Waterhouse Dow 30 Fund. Discover Brokerage recently filed with the SEC to create an S&P 500 index fund, and DLJdirect offers its customers five proprietary funds. Schwab's money manager, Charles Schwab Investment Management, introduced a new family of institutional index funds called Institutional Selecta Index Funds just this month.

E*Trade was ranked the No. 1 Internet brokerage by Gomez Advisors for the third quarter of the year, largely because of improvements in its website. This is the first time that E*Trade has held the No. 1 position. DLJDirect, which had held the position, fell to No. 2. Discover and Waterhouse were number three and four respectively. Schwab ranked tenth in the survey.

E*Trade's new fund family should help the online brokerage with its image and its customer base, says Steven Hall, a senior analyst at Gomez.

"It's an extension of their brand; now they seem much larger," Hall said. "It seems to be getting pretty good press."

E*Trade currently offers over 4,000 mutual funds through its Mutual Fund Center. A family of proprietary funds would provide E*Trade with an alternative revenue stream to advisory fees. Although shareholders of the E*Trade fund, who must also open an E*Trade account, are required to get all their annual reports, statements and proxy information electronically, they can buy or redeem shares either on the website or by phone. Investors can use an automated voice system for free, or they can sell shares through an E*Trade broker for $15.

Other proprietary products to be offered under the E*Trade Funds name will include more index and fund-of-fund products, say E*Trade officials. Barclays will also be sub-adviser to the future funds.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.