Lehman In Your ETF’s Name Is Not a Worrisome Thing

October 2nd at 12:00pm by Tom Lydon

Lehman Brothers Exchange Traded Funds (ETFs)A number of exchange traded fund (ETF) investors are left wondering, “What is in a name, particularly those funds with Lehman in the title?”

At times like these, you can forgive those who see a name synonymous with “bankruptcy” in the title of anything. For example, there is the Lehman 1-3 Year Treasury Bond (SHY) and the Lehman TIPS Bond Fund (TIP).

These and other funds would lead many to think that they’re in the doldrums, taking their lumps amid the credit turmoil, with nothing to their name or to those who put their money into them. But in reality, they are doing very well, Mitch Tuchman for Seeking Alpha reports. Especially right now, as the credit crisis has sent investors seeking shelter in areas that include Treasury bonds.

Tuchman explains that indexes are licensed to ETF providers, and Lehman Brothers happens to be the largest provider of fixed income indexes. Lehman simply decides how the index is constructed and which debt securities go into a certain index.

Unlike exchange traded notes (ETNs), which are as good as the credit of the issuer, ETFs don’t share their risk of default. Lehman did have three ETNs, which may be going under, since Barclays said they won’t be assuming the debt of those funds. Fortunately, most of the $15 million in them was probably seed money.

The company is still waiting for an exemption from the Securities and Exchange Commission (SEC) to take over the calculation of the indexes. Under the rules, an ETF cannot track an index owned by the parent company. WisdomTree and VanEck Global have special exemption status for some of their ETFs tracked by their own indexes, reports Richard Roberts for Investment Adviser.

For now, it’s business as usual, and Barclays has a temporary exemption to operate the indexes normally while the SEC decides.

There are 52 Lehman fixed income indexes. ETFs are based upon the Lehman indexes because the provider of these ETFs has licensed the Lehman index for its fixed income products in order to construct, manage, and maintain what goes into the ETF.

In a nutshell, Lehman just decides what to put in the index, and what happened to the firm is independent of them.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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