NETS ETFs: Something different, or more of the same?

June 13, 2008 - PRLog -- In its latest issue, Don Dion’s ETF Report takes a hard look at the new ETFs offered by Northern Trust. Donald R. Dion, Jr., publisher of the family of Fidelity Independent Adviser Newsletters, www.fidelityadviser.com, and chief investment strategist of Dion Money Management, www.dionmm.com, sized up the new ETFs and compared them to similar issues from iShares. With the influx of new products into the marketplace, it is often difficult to appraise funds with similar objectives. In his analysis, Dion concludes that while the underlying indexes used by Northern Trust may provide better correlation, the products might still not be user friendly enough for average consumers.

Earlier this spring, Northern Trust, the Chicago-based bank with approximately $4 trillion in assets (about $780 billion of which are under investment management), became one of the newest entrants into the ETF marketplace. On April 9, the bank’s asset management unit, Northern Trust Global Investments, launched the first of its Northern Exchange Traded Shares, or “NETS”—a family of country-specific funds that place the newcomer in direct competition with such ETF heavyweights as Barclays iShares, Vanguard and PowerShares. Each of these well-known firms already has a line of established international, regional or country-specific funds, such as the iShares MSCI Brazil Index Fund (EWZ), the PowerShares Golden Dragon Halter USX China Portfolio (PGJ) or the Vanguard Emerging Markets ETF (VWO).  

On first analysis, Dion conjectures that Northern Trust’s NETS appear to be directly aimed at iShares, which was the first fund sponsor to stake a claim in the international ETF space and is still the largest player. While Northern Trust doesn’t yet offer regional ETFs comparable to those in the iShares stable—the EMU Index Fund (EZU), the Pacific ex-Japan Fund (EPP), the S&P Europe 350 Index Fund (IEV) and the S&P Latin America 40 Index Fund (ILF)—Northern Trust reportedly has two global ETFs in the works.

So how does Dion think they stack up against the competition? He says that the principal difference between NETS and the iShares country-specific funds lies in their underlying indexes. Instead of the MSCI International Equity indexes that Barclays licenses for its iShares line, Northern Trust uses the index that is most widely followed in the country in question. For instance, the NETS CAC40 Index Fund, which tracks the French stock market, uses the CAC 40—essentially, the Dow Jones Industrial Average of France—as the basis for the fund. Similarly, Northern Trust uses Germany’s DAX Index for its exposure to the German market, the FTSE 100 for the U.K., etc.

According to Northern Trust, building country-specific ETFs around the most widely followed “local” indexes provides a couple of important advantages. First, investors who wish to pursue sophisticated strategies using index futures and options contracts can do so more easily, since the tracking indexes for the NETS ETFs have the biggest share of those markets. Northern Trust also believes that NETS may prove to be more liquid than are the country-specific funds sponsored by their competitors. Because the indexes tracked by NETS are so widely followed and frequently traded, the market makers who create and redeem NETS may be able to do so more efficiently.

While those differences may be significant for the hedge funds and institutional traders that typically deploy sophisticated hedging strategies or trade in large blocks of shares, how important are they for individual investors? Dion urges that, “in terms of holdings, the new Northern Trust ETFs and their iShares competitors just may not be different enough under the surface to matter to most do-it-yourselfers.”

For example, the NETS CAC40 Index Fund (FRC) and the iShares MSCI France Index Fund (EWQ) offer investors fairly similar cross sections of the French economy.

NETS CAC40 Index Fund (FRC)’s Top Ten Holdings (As of 5/30/08)

Company Name                              Symbol                                     Weighting

Total SA                                         (Paris FP.PA)                               13.82
Bnp Paribas                                    (Paris:BNP.PA)                              7.09
Sanofi-Aventis SA                          (Paris: SAN.PA)                              6.50
Arcelormittal – Com Stock             (Paris MTP.PA)                             5.72
France Telecom                              (Paris:FTE.PA)                              5.38
Axa                                                 (Paris:CS.PA)                                 4.78
Societe Generale-A                         (Paris:GLEZ4.PA)                          3.64
Carrefour SA                                   (Paris: CA.PA)                               3.20
Group Danone                                (OTC- GDNNY.PK)                     3.16


While scope remains an important factor, Dion cautioned investors to keep a critical eye towards net assets —many of the NETS funds have yet to attract the critical mass, $10 million, that most commentators agree are required to maintain an ETF. As of May 30, after six weeks of trading, the NETS CAC40 had about $2.6 million under management. The comparable iShares fund has $350 million in net assets. Northern Trust, however, is no cash-strapped ETF startup.

Despite the inherent risks associated with investing in new classes of products, Dion believes that, “as long as the bank puts enough marketing muscle behind its NETS, they should be around for the long haul.”

About Don Dion:
Don Dion is the publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors Don’s commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the United States and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers. http://www.fidelityadviser.com/
Mr. Dion is also president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Massachusetts, Dion Money Management manages more than $770 million in assets for clients in 49 states and 11 countries. A licensed attorney in Massachusetts and Maine, Mr. Dion has more than 25 years’ experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management. http://www.dionmm.com/

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Fidelity Independent Adviser is a family of newsletters, that provides to a broad range of investors Don Dion’s commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the United States and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. http://www.fidelityadviser.com/