ICI forms ETF committee

The Investment Company Institute has created a committee for exchange traded funds in what some say is an effort to head off the possibility that ETF providers will create their own trade association. "Through this committee, we expect to pursue an even more active agenda on behalf of this large and growing segment of the industry," ICI spokesman Ed Giltenan wrote in an exclusive prepared statement. The Washington-based trade association for mutual funds last month created the committee, which comprises senior executives of many ETF sponsors. The ICI declined to provide further details on the committee.

HISTORY OF GRUMBLING

ETF sponsors have long grumbled that the ICI doesn't do enough on their behalf and that a separate association may be in order. The ICI's creation of a committee is a possible precursor to creating a separate ETF unit within the organization, said Jim Ross, managing director of State Street Global Advisors in Boston, who oversees the marketing of his company's ETFs. "The ICI caught wind [of ETF executives' discussing the possibility of creating a separate association], and they said, 'Do you want to try this as part of the ICI?'" he said. But ETF industry executives said they will watch the ICI's actions closely to make sure that their needs are met. "There's a lot at stake, and there has to be some [true] representation there," said Christian Magoon, head of ETFs for Claymore Securities Inc. of Geneva, Ill., which sponsors 36 ETFs with $2 billion in assets under management. He serves on the ICI's newly formed ETF committee. "This is an attempt to see whether [the ICI] can do mutual funds and ETFs under the same roof" Mr. Magoon said. "The ICI seems earnest in responding, but if it's ineffective, it wouldn't surprise me to see the ETF industry [create an association] on its own."
Indeed, all options are on the table, agrees Michael Latham, managing director and head of iShares Americas for Barclays Global Investors of San Francisco, which is the largest provider of ETFs in terms of assets. "ICI has taken a first step in greater support of ETFs. However, there remains a need for an industry advocacy group for ETFs that is as innovative and dynamic as the industry itself," Mr. Latham said. "We're definitely talking more about how we can work as an industry group within the ICI or form our own industry group," he said. The Vanguard Group Inc. of Malvern, Pa., doesn't question the ICI's effectiveness, however, said Rebecca Cohen, a spokeswoman for the company. "Our stance is that ETFs are open-end mutual funds, which already have a highly effective trade association in the ICI," she said. Vanguard's support aside, the ICI had better not drop the ball on ETFs, said Charles "Chip" Roame, managing principal of Tiburon (Calif.) Strategic Advisors. "It would be a grave mistake for the ICI not to corral this interest. ETFs will not surpass mutual funds in assets under management anytime soon, but they may rival them in net flows," Mr. Roame said. "The ICI is motivated to keep ETFs close to the vest, unlike their less urgent need to keep managed accounts and hedge funds close," he said. "ETFs are a fundamentally important product." The impetus behind the ETF providers' interest in potentially starting their own trade association is the skyrocketing number of small ETF providers, Mr. Latham said. The number of ETFs last year soared to 672 funds, from 374 at the end 2006 and 221 at the end of 2005. Many of these new issues have less tax efficiency, less transparency and higher fees than traditional ETFs, a departure from the norm that could tarnish the sterling reputation of the whole industry, said Barclays spokesman Lance Berg. "How do we protect ourselves?" Mr. Latham asked. "We have to say iShares are iShares, and iShares aren't the entire industry." State Street Global Advisors shares Barclays' concern. "I want to make sure that if there's headline risk out there, we're on the flight-to-quality side," Mr. Ross said. Using the analogy of the mutual fund scandals, he said: "You want to be [the personification of] Fidelity [Investments] or T. Rowe Price [Group Inc.]; you don't want to be Putnam [Investments] or Janus [Capital Group Inc.]." The largest issuer of niche ETFs is PowerShares Capital Management LLC of Wheaton, Ill. The company declined to comment. PowerShares had 6.6% of the total ETF assets in the United States as of Dec. 31, which placed it fourth in assets, behind Barclays with 53.1%, SSgA with 25.5% and Vanguard with 6.8% as of that date. But the concern about new entrants to the ETF industry is overblown, said Nicholas Gerber, president of Victoria Bay Asset Management LLC of Alameda, Calif., which introduced three ETFs last year that have already attracted $1 billion in assets. "[The legacy companies] defined the [ETF] market, and we redefined it," he said of the newer innovative competitors. "It's not their playground anymore." However, there needs to be a balance between healthy competition and investor interests, said Paul Mazzilli, ETF analyst for Morgan Stanley of New York. "There's a true departure" in how some new ETFs vary from old ones, he said. "We're seeing it, and it's arguably not in the best interest of investors," Mr. Mazzilli said. Indeed, the ICI doesn't see its role as weeding through the ETFs to separate the good funds from the bad ones. "The free market does a good job of determining which products will survive," Mr. Giltenan said in an interview. But the ICI should be lobbying for the Securities and Exchange Commission to do more to protect investors, said Herbert Blank, senior vice president of Rapid Ratings International Inc. of New York. "You can't make ETFs idiot-proof, but, for instance, the SEC could mandate the expected tax efficiency of the product and the expected tracking," he said. "These should be disclosures on the one-pager you get from the exchange." Brooke Southall can be reached at bsouthall@crain.com.