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Bank of New York Has ADR Index ETFs in the Works

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Many institutional and retail investors like exchange-traded funds (ETFs) for cheap exposure to foreign markets. Bank of NY wants to drive costs down even lower, and has filed an exemptive application with the Securities and Exchange Commission (SEC) to launch ETFs based on its ADR indexes.

American Depository Receipts (ADRs) are certificates traded in the U.S. that represent an interest in shares of a foreign company. Bank of NY currently maintains over 100 ADR indexes tracking countries, sectors, regions, and industry groups. It also manages the second-largest and most highly traded ETF, the Nasdaq-100 Tracking Stock (QQQ).

Although he was unable to discuss specific details because Bank of NY is still waiting for SEC comment on an application filed in May, Joe Keenan was able to answer general questions. Mr. Keenan is vice president of ETF products at Bank of NY.

Keenan said the Bank wants to leverage its ADR indexes because they could be used for international ETFs with lower expenses than what is currently available. The Bank believes it's cheaper to use the U.S. market, rather than buying shares listed on foreign markets.

"Bank of NY expects the expense ratios to be at least 50% less than comparable funds," said Tim Keaney, managing director of the Bank's ADR division, in a July 8 Fund Action newsletter article.

According to Keenan, Bank of NY would be most likely to roll out ETFs based on emerging or developed markets, followed by possibly a global large-cap fund. He said the Bank has an aggressive launch date of sometime in the fourth quarter of this year. At this point, it's unclear on which exchange the ETFs would trade.

Although the Bank has many different flavors of ADR indexes, Keenan said that not all are fund friendly because they don't meet diversification standards and underlying liquidity tests.

More European sector iShares

Barclays Global Investors (BGI) today launched four new pan-European ETFs on the London Stock Exchange (LSE). They are tied to the following Bloomberg European indexes: cyclicals, industrials, resources, and staples.

The new funds compliment four existing iShares trading on LSE tied to financials, pharmaceuticals, technology, and telecoms. All eight have expense ratios of 0.50%.

"Investors are developing a deeper understanding of sector investing in Europe, as diversification out of domestic markets grows," said John Demaine, director of iShares at BGI.

Certainly, traditional home bias is loosening as economic and regulatory barriers fall throughout Europe. A single euro currency is also removing the risk of country fluctuation, making investing in sectors across countries and regions a realistic option.

For U.S.-based fund managers, the race is on to develop European products. According to Gavin Quill of Boston-based Financial Research Corporation, U.S. companies have realized the need to enter new geographic markets as the domestic fund industry is beginning to slow, and demographic projections suggest it may slow even more. Although it started from much lower numbers, Quill notes that mutual fund asset growth in the European Union (EU) has outpaced the U.S. Over the past five years, the EU has experienced 23% growth per year, compared to 18% in the U.S.