ETF roadblocks

07Nov05

Given the number of equity ETFs you would not think there is a problem in getting non-equity ETFs approved and trading. Au contraire. Two stories today show that there still are some roadblocks into getting a wider palette of ETFs.

John Spence at Marketwatch.com notes a roadblock on the way to a silver ETF. Two gold ETFs (GLD and IAU) are already trading and have accumulated over $3.4 billion in assets. A lobbying group is intent on blocking the launch of the fund.

The Silver Users Association, a nonprofit lobby group interested in keeping an orderly silver market, has asked the Securities and Exchange Commission to deny an ETF currently in registration from investment manager Barclays Global Investors.

The organization says a silver ETF would create a price squeeze in the metal because the fund would have to buy a large amount of silver to back the fund’s shares prior to the launch.

This is indeed surprising. Why should the form the commodity takes, i.e. an ETF, versus the spot or futures market, have such an outsized effect on the underlying market? While some analysts don’t believe it would enough opposition, including the publicly-traded silver mining companies are powerful enough to block the launch.

While the issues are different, the story is the same when it comes to an expansion in the number of fixed income ETFs. Jen Ryan in the Wall Street Journal reports that while the interest is high in seeing corporate, high yield and emerging market debt ETFs the issue of pricing seems to be holding a launch any time soon back.

Even though there are already six bond ETFs on the market the issues involved are novel enough for the SEC that the approval process is more cumbersome with each fund requiring “exemptive relief.�? In other words, don’t hold your breath.