There is a bit of down-home feel about my lunch with Noel C. Archard, Head of Product Development at iShares. The restaurant serves traditional Neapolitan food and the chef emerges from the kitchen to chat with us in Italian, seemingly indifferent to whether or not we understand him. Archard doesn't speak Italian, but he has ordered gnocchi, or potato dumplings. He can't resist trying gnocchi whenever he eats at an Italian restaurant, he explains, in the hope of finding something that tastes as good as the ones his Italian grandmother used to make.
But there is nothing down-home about his company, iShares. It is the largest player in the exchange-traded funds (ETFs) market segment, probably the fastest growing asset class in the U.S. market over the past two years. The number of ETFs rocketed from under 100 at the start of 2006 to 546 in August 2007, based on data from the Investment Company Institute. The number of sponsors has proliferated, too, issuing an ever-growing number of ETFs tied to a baffling variety of indices and investment strategies.
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Who: Noel C. Archard, CFA, Head of Product Development, iShares, Barclays Global Investors
Where: Ottimo, 6 W. 24th St, New York
On the Menu: Gnochetti al pesto, zuppa del giorno and information geared to FAs' clients
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Among them, iShares, part of San Francisco-based Barclays Global Investors, which in turn is a unit of Barclays, the U.K. bank, is a giant, controlling over 55 percent of assets under management in the industry. In large part thanks to iShares, Barclays Global Investors is the largest asset management company in the world.
Archard, whose background is in mutual funds, says he still finds new features to admire in ETFs, the kind of flexibility, transparency, cost effectiveness and tax efficiency they provide for investors, as well as convenience in running their business for financial advisors. While Barclays' iShares conducts extensive market research and identifies the universe of potential users of its new funds before launching them, Archard also says that there are often surprises.
For example, in September iShares wheeled out a pioneering new product, a municipal bond fund. The fund, (AMEX:MUD), which beat out by a few days a rival by State Street, tracks the price and yield performance of a Standard & Poor's municipal bond index of over 3,000 issues in the highly fragmented muni market.
"In addition to the usual suspects," says Archard, "we saw interest from foreign investors. It turns out that the bond issued by the state of California is treated by some foreign investors as sovereign debt — due to the size of the state's economy."
Shielding From VolatilityThe diversity of users — and the variety of investment strategies ETFs allow investors to implement in a cost-effective way — has been a positive factor for the ETF market, especially in the current period of heightened volatility.
"If you look at the ETF sector over the past 10-to-12 years," asserts Archard, "it has been a straight-up progression — even though we have been through some dire markets over this time period."
In particular, this year volatility has increased and Wall Street suffered several fairly severe bouts of selling, especially in early March and in July-August. This has not kept new ETFs from coming to the market in substantial numbers.
