Lee Kranefuss Interview

By Jim Wiandt, Managing Editor

Lee Kranefuss, CEO of U.S. Individual Investor Business at Barclays Global Investors, recently sat down with IndexFunds.com's Jim Wiandt to discuss the proliferation of iShares and the future of exchange-traded funds (ETFs).

IF.com: What do you see as the most significant benefits of investing with exchange-traded funds (ETFs)?

LK: It's really the fact that they're a combination of the features of stocks and funds. You're getting the professional management and diversification you'd expect with a fund and, at the same time, you're getting the portability and flexibility of a stock you can buy and sell at any brokerage account. And in many dimensions, the fact that you can buy and sell it during the day if you use margin or short dimensions, for example hedging, you're able to do those as well. You can borrow against it. So it's really the best of both worlds.

IF.com: What do you see as situations where investors might do better with a traditional open-ended mutual fund?

LK: Probably the simplest situation is if you're doing very small dollar cost averaging as a starting-out investor. Unless you're in an account with unlimited trading privileges, you're going to pay a transaction charge, a commission every time you buy and sell. So if you're putting in $200, even then an $18 trade is a big piece of it. So ETFs are probably not right for the small dollar cost averagers or starting-out investor. They're for somebody who already has a reasonable portfolio of stocks and/or funds and needs to look at ETFs as a fair alternative.

IF.com: Has Barclays looked at any way to get into the 401(k) market, or is it just that the structure's not friendly to it?

LK: Well, I don't know if it's friendly or unfriendly. Right now we are concentrating on getting out there to the retail and institutional markets and over time we'll look more carefully at how we could get into some of the other markets, if it makes sense.

IF.com: Is Barclay's working to narrow ETF premiums and discounts underlying net asset value(NAV)? Are you satisfied with the levels of transparency?

LK: There's a lot of misinformation about what goes on and the importance of current price or last trade versus net asset value. If I could take a couple minutes, I'll take you through a little bit of some of the practical issues that go into that and why that may not be as big a concern as some have made it out to be.

The first thing to know is that NAV is cut at 4:00 p.m. EST on most funds. But there's no reason it has to be. As far as I know, it's done that way by convention because that is the last trade of the major exchanges for stock. The first thing to note about this is that ETFs continue trading; I think all U.S. ETFs trade until 4:15. So if a fund is active and it's got a lot of trades going on . . .

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