Upstart company launches health-care ETFs

Jan 29, 2007 @ 12:01 am

By David Hoffman

PHILADELPHIA — The first exchange traded funds from upstart company XShares Advisors LLC began to appear last week with the introduction of five ETFs designed to represent specific areas of the health-care sector.

The HealthShares are the first of 20 such ETFs the New York-based company plans to bring to market, said William J. Kridel Jr., chairman and chief executive.

The five launched last week include HealthShares Cardio Devices ETF, HealthShares Diagnostics ETF, HealthShares Emerging Cancer ETF, HealthShares Enabling Technologies ETF and HealthShares Patient Care Services ETF

But XShares — formally Ferghana-WellSpring LLC — plans to offer more than just ETFs that slice and dice health care.

The company also plans to launch 22 StateShares, which give investors exposure to companies in specific states.

And in a joint venture with TD Ameritrade Holding Corp. of Omaha, Neb., XShares this month registered to bring the first-ever life cycle ETFs to market.

Some financial advisers, however, said that they see few reasons to invest in them.

Too segmented

The HealthShares slice up the health-care market a little too finely to be of much use to the average investor, said Jim King, a wealth manager with Balasa Dinverno & Foltz LLC in Itasca, Ill.

The only people who might find them useful are doctors with insight into the health-care subsegments, but even they should steer clear, he said.

Even more perplexing are the proposed StateShares, said Richard Romey, president of ETF Portfolio Solutions Inc. in Overland Park, Kan.

“Why would you invest in specific companies in a specific state?” he asked. “Doesn’t that go against just finding [the] best companies?”

Such advisers, however, are missing the point, Mr. Kridel said.

The creation of “targeted portfolios” allows investors to home in on companies in various subsectors or even geographic regions. Investors wouldn’t get that exposure by investing in a typical ETF, Mr. Kridel said.

But by investing in an XShare ETF, they get that exposure in such a way as to provide a certain level of diversification nonetheless, he said.

For example, each HealthShare ETF comprises between 22 and 25 stocks, Mr. Kridel said. The proposed StateShares will have a similar look.

Some industry experts, however, aren’t sold.

XShares’ proposed lineup of ETFs is symptomatic of ETF providers’ “just throwing everything against the wall to see what will stick,” said Sonya Morris, editor of Morningstar ETFInvestor, a newsletter published by Morningstar Inc. of Chicago.

The possible exception, according to some financial advisers, is the proposed life cycle ETFs.

“I think the life cycle funds, for people without a lot of money, it is a great opportunity,” Mr. King said.

XShares, with TD Ameritrade, has registered to offer five such ETFs — the TDAX Funds — each of which would follow an index that would change to reflect an appropriate mix of investments as it neared a specific retirement date.

There are problems, however, with the life cycle concept, industry experts said.

Many of the life cycle mutual funds in existence don’t have a good reputation for delivering solid performance, said Jim Wiandt, president of Index Publications LLC in New York.

If the proposed life cycle ETFs are to catch on, they will have to prove that they can do better, he said.

Also, the life cycle concept seems best suited for 401(k) plans, Mr. Wiandt said. ETFs, however, are not a major presence in such plans, he said.

Because ETFs are traded like stocks, the only way many 401(k) participants have access to them is through a brokerage window. Until the ETF industry finds a way in which ETFs can more easily sit side by side with mutual funds, the consensus among industry experts is that ETFs will never be a major presence in such plans.

XShares, however, seems undeterred.

Its partnership with TD Ameritrade — which has more than 6 million customers — guarantees an audience for the proposed ETFs, Mr. Kridel said.


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