The Markets January 15, 2008

2007 a Year of Records for ETFs

State Street Global Advisors’ (SSgA) US-Listed ETF Industry Review and 2008 Outlook shows 2007 was a record year for exchange-traded fund (ETF) asset growth, trading volume, and product development.
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Through December 31, 2007, ETF assets grew by approximately 45% to $608 billion. ETFs based on international indexes were the largest driver of asset growth for the year – accounting for $59 billion of the $187 billion increase, SSgA data showed. Notable asset growth also occurred in ETFs based on growth, fixed income, and commodity indexes – adding over $17 billion, $14 billion, and $12 billion, respectively.

The average daily volume in December 2007 for all U.S.-listed ETFs averaged over $58 billion. This represents a 141% increase from December 2006, when the average daily dollar volume was $24 billion. The top three U.S. ETFs in terms of dollar volume were the SPDR S&P 500, iShares Russell 2000 Index Fund, and the NASDAQ-100 Index Tracking Stock – the same three leaders as in 2006, SSgA said.

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Currently, there are 92 ETFs with a market capitalization of over $1 billion, compared with 72 as of year-end 2006 and just 10 in 2001. There are 537 ETFs with less than $1 billion in assets – 375 of which have less than $125 million.

Overall, 270 new ETFs were introduced to the market in 2007, which currently represent over $20.6 billion in assets or roughly 3.3% of all ETF assets under management in the U.S. In 2006, 156 new ETFs garnered $12 billion in assets, or roughly 2.8% of all U.S. ETF assets under management.

The most notable area for product introduction was the Specialty-Domestic area, which includes fundamentally weighted index ETFs, as well as inverse or leveraged ETFs. Fixed income saw the introduction of 42 new ETFs, and the international ETF segment, combining developed markets, emerging markets, and specialty, added 72 new funds.

Although product expansion in 2007 focused on the specialty areas of the marketplace, investors expressed a preference for international ETFs, as well as those in the large cap and growth segments, according to the SSgA report. Currency, fixed income, and commodity ETFs also saw sharp increases in demand.

Five new ETF providers emerged in 2007, bringing the industry total to 19, however market share among managers changed minimally. The four largest managers, Barclays, State Street, Bank of New York, and Vanguard continue to hold over 92% of the industry’s assets.

Looking ahead, State Street noted that 2008 may be the year of the first actively managed ETF. At least two providers have filed for ETFs that are not based on an underlying index.

Compliance January 15, 2008

Supreme Court Ruling Limits Shareholders’ Ability to Sue

The U.S. Supreme Court has ruled that defrauded shareholders should not necessarily be allowed to sue advisers, lawyers, accountants, and vendors that serve the company that committed the underlying crime.
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The Wall Street Journal reported that if the battle between the trial bar and business had gone the other way, it could have significantly expanded the power of defrauded shareholders to sue and been a boon to the multibillion-dollar field of securities class-action lawsuits. However, the court’s opinion maintains a status quo, the WSJ said, and extends Wall Street’s winning streak on securities cases.

In the case, Wall Street successfully argued that Congress intended only the Securities and Exchange Commission (SEC) to police alleged fraud, and not to open the door to lawsuits by private shareholders. At issue was what role third parties must play in order for them to be sued by shareholders.

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Corporations and the U.S. Justice Department contended that private lawsuits are limited to cases when investors rely on fraudulent statements, and that suits can be brought only against those who control the fraud, the news report said.

“We conclude the private right of action does not reach the customer/supplier companies because the investors did not rely upon their statements or representations,” Justice Anthony Kennedy wrote in the majority’s opinion. The majority ruled that investors must rely on deceptive acts in order for a civil lawsuit to succeed under federal securities laws. Kennedy was joined in the majority by Chief Justice John Roberts Jr. and Justices Antonin Scalia, Clarence Thomas, and Samuel Alito. Justices John Paul Stevens, David Souter, and Ruth Bader Ginsburg dissented.

A Shareholder Suit against Vendors

The case before the U.S. Supreme Court involved Charter Communications Inc., a St. Louis cable provider, accused in the late 1990’s of engaging in accounting fraud to meet analyst expectations. Four former Charter employees were indicted and pleaded guilty to conspiracy, and the company also agreed to pay $144 million to settle a class-action suit led by one of its shareholders, Stoneridge Investment Partners of Malvern, Pennsylvania.

However, Stoneridge also sued Motorola Inc. and Scientific-Atlanta, now a unit of Cisco Systems Inc. Stoneridge accused both vendors of agreeing to charge artificially high prices for cable boxes they sold to Charter, then using the extra money to “buy” advertising from Charter – money Charter used to inflate its bottom line, the Wall Street Journal reported.

A 1994 Supreme Court case that said shareholders cannot sue third-party companies for aiding and abetting prompted a federal court to dismiss Stoneridge’s lawsuit against Motorola and Scientific-Atlanta. The federal appeals court in St. Louis affirmed that decision.

After another appeals court ruled in an unrelated case that shareholders could sue third-parties under certain circumstances, Stoneridge asked the Supreme Court to rehear its case.

The WSJ noted that both sides of the issue lined up strong support. Siding with the trial bar were two House committee chairmen, 18 pension funds, 32 state attorneys general, and the SEC. Backing big business were the U.S. Chamber of Commerce; the Nasdaq and NYSE Euronext exchanges; seven high-profile New York lawyers; and the Justice Department’s solicitor general, who represents the views of the White House.

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