E*TRADE’S WELCOME MAT IS OUT FOR FUNDS: NO ONE’S TOO SMALL TO STRIKE A DEAL WITH THE ONLINE MART

In much the same way grocery supermarkets strive to lure shoppers with coupons and big sales, mutual fund supermarkets are dangling carrots in front of fund companies.

E*Trade Group Inc., seeking to lure the smaller funds its larger competitors disdain, has become the exclusive no-transaction fee distribution partner of the 4-year-old Bridgeway Funds.

According to David Arnold, shareholder relations manager with Houston-based Bridgeway Capital Management, five Bridgeway funds are now available through the fund malls of Fidelity, Waterhouse, Jack White and Ameritrade — but each tags on a transaction fee. The lineup consists of large-cap and micro-cap index funds, a non-indexed micro-cap fund, an aggressive-growth fund and a social responsibility fund.

The arrangement also allows E*Trade customers to get in on the advanced subscription for the Bridgeway Micro-Cap Limited Portfolio, set to launch in August. Up to $8 million in fund shares will be offered to E*Trade users. Desiring to stay small, Bridgeway will pull in the welcome mat to new investors at $27.5 million, and bolt the doors to all investors when the fund reaches $55 million.

Subscription partnerships are a relatively new phenomenon. Charles Schwab Corp. has made a sideline of partnering to pre-offer funds. Twice in the past year Stein Roe & Farnham Inc. has happily relied on Schwab as its subscription partner, says Tom Butch, president of Stein Roe Mutual Funds. Schwab escorted $24 million into the Stein Roe Large Company Focus Fund during the seven-week subscription period which ended June 25. Last summer, Stein Roe’s Growth Opportunity Fund pulled in $20 million directly through Schwab.

in the zone

E*Trade’s strategy is to build a comfort zone where small to mid-sized fund advisers can sell their funds and cozy up to investors, says Brian Murray, vice president and general manager of the E*Trade Mutual Fund Center. Smaller funds with relatively insignificant assets don’t necessarily need the likes of a big supermarket. “They want a smaller, more reasoned place,” he says.

E*Trade wants to win the hearts of petite funds kept at a distance by other supermarkets, and to gain favor with investors who seek smaller, undiscovered or niche funds with a unique flavor, Mr. Murray says. Many small or start-up funds grouse at the high cost of getting traditional supermarket space. Many have been unwilling or unable to pay the supermarket entry toll.

Since launching its electronic supermarket program this past November, E*Trade Securities has made significant inroads. Now the No. 2 online brokerage,it has seen total net income double since the quarter prior to the debut of its fund supermarket.”E*Trade will succeed by quickly and broadly offering services on a price-efficient basis,” says Mark Wolfenberger, technology analyst at Deutsche Bank Securities.

Most of the fund supermarkets rolled out in the past few years have done so without much fanfare, mostly for the convenience — and retention — of existing clients. Those who hope to tap the market of retail do-it-yourself investors must increasingly look for value-added ways to distinguish themselves from the pack and go head to head with supermarket pioneer Charles Schwab and rival Fidelity FundsNetwork. Perhaps more important, they must also offer innovative services to lure fund firms.

E*Trade began with around 3,000 funds and now offers almost 4,000 funds via phone or the Internet, about 500 of them without a transaction fee. And that number is growing. A dozen or so deals like the one with Bridgeway are in the works.

breaking rules

E*Trade has also broken an unwritten rule by allowing advisers to rub elbows with E*Trade investors. Supermarket gatekeepers have been fiercely protective of their investors, keeping shareholder identities a secret and access to a minimum. But, maintains Mr. Murray, fund advisers have just as much right to talk to their investors as E*Trade does.

Later this year, E*Trade will add toll-free phone numbers for all fund partners to its proprietary web site as well as each fund’s Statement of Additional Information and Annual Report. Prospectuses are already online. It will also offer a paperless option, allowing investors to receive all required fund documents electronically — a huge savings to funds.

E*Trade has also been busy globetrotting. It trades funds online in Canada and Australia and recently signed agreements to offer such services in Japan, Israel and the U.K. Earlier this month, it struck a deal with Tokyo-based electronic data distribution firm Softbank Corp., its partner in the Japanese venture, to develop E*Trade Korea. Softbank also took a 27.2% stake in E*Trade Group Inc., paying about $400 million. The announcement did wonders for E*Trade’s stock: After languishing in the low to mid-20s all year, it shot up 41% last Monday, the first full day of trading after the announcement.

Mr. Murray says there is a lot of interest abroad in U.S. mutual funds, adding that a handful of U.S. fund advisers have approached E*Trade about offering their wares internationally.