Europe

Barclays Global Investors Launches EAFE iShares

Europe

At long last, Barclays Global Investors (BGI) has answered the call of indexers and today launched the new iShares MSCI EAFE exchange-traded fund. Expense ratio: a razor-thin 0.35%.

The ETF is hitched to the new float-adjusted "provisional" MSCI EAFE index. Index provider Morgan Stanley Capital International (MSCI) is overhauling its equity indexes for free-float and increased coverage, and in May it told us what the rebalanced indexes will look like when the transition is completed in May 2002. According to BGI, the new fund is an optimized portfolio holding about 800 securities out of 1,040 in the provisional index.

BGI's timing of the MSCI Europe/Australia/Far East (EAFE) iShares release couldn't have been much better. The San Francisco-based fund manager believes the financial industry is looking for tools to manage the switch, which is why it rebalanced its 21 MSCI iShares to the provisional indexes earlier this summer.

"We wanted to bring a product to the market based on the provisional MSCI indexes for two reasons," said Feng Ding, emerging markets portfolio manager for BGI. "First, we can help facilitate the switch for managers who are looking to make the transition to the provisional indexes. Also, new investors in the fund with a time horizon of longer than one year will not have to endure the turnover and transaction costs necessary to get to the rebalanced indexes."

BGI estimates that funds making the switch to the provisional indexes will incur approximately 30% turnover this year.

The EAFE iShares are very competitive in terms of cost. For example, the Fidelity Spartan International Index Fund and the Vanguard Developed Markets Index Fund, which both track EAFE, have expense ratios of 0.35% and 0.32%, respectively. According to Morningstar, the expense ratio for the average actively-managed foreign stock fund is 1.70%, and 0.97% for index funds that track the MSCI EAFE. The chart below shows how the two categories have performed over the last five years:

Category
YTD
1 year
3 year
5 year
Active foreign stock funds
-16.76%
-22.50%
1.67%
4.71%
MSCI EAFE index funds
-15.01%
-22.55%
0.06%
4.81%

Source: Morningstar, returns through 8/16/2001 [/:Author:]
Additionally, the unique "in kind" creation/redemption process employed by ETFs should reduce taxes if the fund is held in a taxable account. However, Morningstar analyst Christopher Traulsen points out that ETFs can only be purchased through a broker, and those commissions can add up over time, particularly if an investor is making monthly contributions.

Still, the new EAFE iShares are a welcome addition for investors who like ETFs, many of whom have been anxiously awaiting the launch of the fund.

"I expect that the MSCI EAFE iShares will rapidly become the most popular
of the international ETF offerings," says Gavin Quill, analyst for Boston-based Financial Research Corporation. "It will prove to be a very compelling
alternative to most broad-based international mutual funds."

Many advisors and analysts recommend diversifying a portfolio with international exposure, although there is disagreement over how much foreign markets are correlated with the U.S. market. The graph below tracks the performance of the MSCI EAFE index and S&P 500 back to 1969.


Sources
: MSCI and Reuters

Round the Clock

Dow Jones Indexes announced it will extend real-time calculation of the Dow Jones Industrial Average to 13 hours a day beginning September 14.

The index will be calculated using component prices from the Deutsche Borse's new U.S. market segment, which will be launched on its electronic trading platform, Xetra. Dow Jones will also use Xetra to price the U.S. and Asian components of the Dow Jones Global Titans 50 index prior to the open of U.S. markets.

The indicative Industrial Average, priced using Xetra, will be available in real-time from 3 am to 9:30 am EST. Dow Jones Indexes said investors and market participants will benefit from more timely dissemination of index values for the Industrial Average and Global Titans 50 before the U.S. market opens.