Investors Sleeping Through Morningstar ETF Rollout

Trading volume in the highly publicized iShares Morningstar exchange-traded funds has been nearly nonexistent since they were rolled out a few weeks ago, but analysts say it's too soon to write them off as shooting stars.

Barclays Global Investors (BGI) launched the line of nine ETFs with the NYSE on July 2. The ETFs, which are bought and sold like stocks, are designed to track indices based on Morningstar's "style boxes," which divide U.S. stocks into the traditional small-, mid-sized and large-capitalization segments and then into value, core and growth pieces.

On the first day of trading, the iShares Morningstar Large Value (JKF), iShares Morningstar Large Growth (JKE) and iShares Morningstar Large Core (JKD) funds had volumes of 200,300, 200,500 and 470,200 shares, respectively. Since then, the three ETFs have rarely pierced the 2,000-share mark. For example, on July 28 the same three large-cap ETFs had a combined trading volume of 10,400 shares.

A number of analysts say the lack of action in the ETFs is largely due to the slow summer trading season as well as the newness of the product.

"The timing for the rollout was not great because of the summer doldrums," said Lipper analyst Michael Porter. "And the declining equity markets have not helped either."

Kevin Ireland, vice president in charge of ETF marketing at the Amex, says it takes a while to draw interest in new ETFs, something he saw firsthand when Vanguard introduced its Viper ETF line on the Amex earlier this year. The Vanguard Growth Viper (VV), which tracks the performance of the MSCI U.S. Prime Market 750 Index, traded close to 22,000 shares during its January debut and earlier this year saw occasional volume spikes to well over 100,000 shares. Now, the ETF's daily volume rarely cracks the 10,000-share level.

In addition, the fact that the Morningstar line is geared primarily toward retail investors familiar with the Morningstar style boxes has also contributed to the low volume, according to analysts. Every day, large institutional investors trade millions of shares of ETFs such as the Spyders (SPY), which tracks the S&P 500, and the Nasdaq 100 (QQQ), which tracks the 100 largest Nasdaq stocks, to hedge their very active positions. Retail investors, on the other hand, tend to buy and sell securities in small lots and on an irregular basis.

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