In response to the increasing popularity of exchange-traded-funds, two firms are about to introduce two variations of the product.
Barclays Global Investors Canada of Toronto has just filed with the Ontario Securities Commission to offer two bond exchange-traded funds based on the five-year and the ten-year benchmark Government of Canada bonds. Borrowing from the name of the 56 iShares of Barclays Global Investors of San Francisco, the Canadian firm is calling the products iUnits.
Everest Funds Management of Omaha, Neb., meanwhile, registered with the SEC Aug. 15 to offer a fund of exchange-traded-funds. To be called the Everest Index3 Fund, it will invest in Spiders, Diamonds and Qubes to gain exposure, respectively, to the Standard & Poor's 500 Index, the Dow Jones Industrial Average and the Nasdaq 100.
"This is just the beginning of the ETF mania," said Geoffrey Bobroff, president of Bobroff Consulting of East Greenwich, R.I. "We are on the cusp of things to come."
"There is no doubt there will be additional types of exchange-traded funds," said Jon Maier, an analyst with PaineWebber of New York. "It's an expanding area. Other companies are looking into managed [exchange-traded] portfolios, but I don't see that happening this year."
Barclays' iUnits Government of Canada 5 Year Bond Fund and iUnits Government of Canada 10 Year Bond Fund are designed to offer advantages over bonds purchased outright or through a conventional, fixed-income mutual fund, said Steve Rive, general manager of Barclays Canada's iUnits.
The biggest advantage of the iUnits bond funds is that they offer price transparency - until now unavailable in the bond market - because they will be traded on the Toronto Stock Exchange, Rive said. As in the U.S., Canadian government bonds are not traded on any common market, so buyers must rely on brokers to make individual calls to market makers for price quotes, Rive said.
Barclays will also be able to obtain better, wholesale bond prices than individual institutions or retail investors could because it will be buying tens of millions of dollars of these instruments at any given time, Rive said.
The bond iUnits are also designed to provide liquidity, Rive said. Each iUnits will invest in a single bond, either the Government of Canada five-year or ten-year bonds, because these are currently the two most-liquid bonds in the Canadian market, Rive said.
In addition, the iUnits will sell their holdings of these bonds annually to update the maturity of the holdings so that they will always be invested in bonds with a ten-year or five-year maturity, Rive said. When such bonds are first issued, they attract market attention and have the greatest liquidity of their lifetimes, Rive said. Besides by being traded on the Toronto Stock Exchange, the iUnits are made more liquid through the updating of their holdings, Rive said.
Unitholders also have the flexibility of being able to redeem shares for Barclays' equity exchange-traded fund, the iShares 60, Rive said.
The iUnits could have particular appeal for institutional investors, Bobroff said. Mid- to small-sized firms might like the ability to buy odd lots of bonds - less than 100 shares - rather than round lots - 100 shares or more - through these exchange-traded fund units. And bond arbitrageurs at larger firms could use the iUnits as hedging mechanisms, Bobroff said.
The minimum investment for the iShares or the iUnits is a single share, said Tom Taggart, a spokesperson for Barclays Global Investors.
Barclays Global Investors is planning to introduce similar, fixed-income iUnits in the U.S., Taggart said. He could not say when the products might be introduced, however, or how they would be different from the Canadian iUnits.
Barclays Canada is expecting the iUnits to be well received, Taggart said. Since Barclays Canada launched the iUnits 60 in September, 1999, this equity exchange-traded fund, which invests in the 60-largest companies traded on the Toronto Stock Exchange, has attracted $6 billion, Taggart said. It is now the largest equity fund in Canada, he said. By comparison, Barclays' 56 exchange-traded funds in the U.S. have a combined $5.5 billion in assets under management, Taggart said.
Barclays is also planning to introduce exchange-traded funds in Japan sometime in the first half of 2001 and is looking into offering actively-managed exchange-traded funds in the U.S., he said.
Meanwhile, a small asset-management firm in Omaha created nine years ago to run the personal finances of a multi-millionaire database entrepreneur, is planning to offer its first publicly-available exchange-traded fund of funds.
Vinode Gupta, chairman of InfoUSA, a $320 million database company, set up Everest Funds Management in 1992 to run his own personal finances and the finances of his company, Gupta said. The company has also handled accounts for other family members and friends, he said.
A few years ago, Gupta became interested in Spiders, Qubes and Diamonds "since a lot of money managers could not beat the major indexes and there was a lot of publicity" about these exotic, new instruments, Gupta said. Gupta shifted his investments among the Dow Jones, S&P and Nasdaq major indices with considerable success, he said. He declined to disclose his returns.
He was pleased enough with his strategy to attempt to develop a fund-of-funds that would move its investments among these three indexes through exchange-traded funds.
"The markets don't go up and down in the same manner, so I found that by mixing them up in different percentages, I could get some pretty good results," said Gupta. "Basically [with this method], you are betting on the American economy, but with some finesse."
The Everest Index3Fund will be sub-advised by Pflug Investment Management, also of Omaha. The goal of the fund is to match or exceed the investment return of the overall stock market, according to the fund's filing with the SEC. It will invest no less than 20 percent, and no more than 60 percent, of its assets in any one of the three exchange-traded funds, according to the filing.
Pflug will adjust the asset allocations quarterly and will not actively trade the shares, said Tom Pflug, president of the advisory firm. The fund's aim is to minimize brokerage commissions and capital gains taxes, Pflug said. Everest Index3Fund will not be taking advantage of the tax benefits of exchange-traded funds - shareholders can redeem shares in individual stocks to avoid capital gains taxes - because it will only hold shares in Spiders, Diamonds or Qubes, Pflug said.
As a deterrent to "hot money," the minimum investment is $10,000, Pflug said.
Pflug hopes to exceed market returns by changing his asset allocations among the three markets, he said.
"If we simply benchmark the fund, we should achieve index-type returns," Pflug said. "If, on the other hand, we do our valuation work correctly, to favor one over the other, we should be able to exceed the markets."
