Bank of New York, the nation's second-largest custodian of mutual fund assets, is talking with several fund companies about possible partnerships in exchange-traded funds.

The banking company is hoping that retail interest in these funds will help it double the fund assets it has under custody within a year, said Joseph Keenan, vice president and product manager of exchange-traded products. "We want to leverage our leadership role in exchange-traded funds," he said.

John Nuveen & Co. of Chicago has expressed interest in working with his bank, Mr. Keenan said. A spokesman at Nuveen, which uses Chase Manhattan Bank as custodian for its funds, declined to comment on any possible deal.

Historically, institutional investors have been the primary buyers of these funds, which hold baskets of stocks, often linked to a major sector or international index. The funds are traded much as individual stocks are on major exchanges. The size of the untapped retail market suggests that this is a growth area, said Thomas Perna, senior executive vice president at the bank.

Bank of New York holds 30% to 40% of the nation's exchange-traded fund assets, with a value of about $40 billion, Mr. Perna said.

Exchange-traded funds have advantages over other portfolios. They tend to be much more tax-efficient than open-end mutual funds because no manager is buying and selling individual securities that expose the fund to capital gains taxes. Also, they can be bought or sold at any time during the trading day while other funds are bought at the end of the market day.

The bank does not market any specific fund to retail or institutional investors - though it may make some of its clients aware informally of the existence of certain funds - primarily because "we don't want to push one fund over another," said Mr. Keenan.

Bank of New York does not plan to get involved in the direct selling of funds, he said. "We have good relationships with passive and active fund managers."

With about $1 trillion of mutual funds under custody - a total that includes about 100 clients and 2,000 individual funds - the bank trails only State Street Bank in Boston, Mr. Keenan said. Mr. Perna said that when assets such as pension funds are included the bank has $6.8 trillion under custody, making it the nation's largest.

Among its larger exchange-traded fund holdings are the Nasdaq 100 Trust - which has a market value of about $13 billion - and the Standard & Poor's Mid-Cap fund - valued at $2.7 billion.

Bank of New York officials said they are confident that the value of exchange-traded fund products will become more apparent over time, and they disputed the contention by critics of these funds that they are inherently risky. Mr. Perna noted that 70% to 80% of the Nasdaq 100 Trust shares are owned by retail investors.

Some of Barclays' recently launched iShares appeared to make significant pricing disparities, but most exchange-traded funds' prices close above their net asset value about as frequently as they close beneath it, said Mr. Keenan, citing research from Ernst & Young. About 60% of the time these funds closed within 25 cents of their net asset value, he added.

Europe is likely soon to be a tremendous growth area for exchange-traded funds since the domestic market may saturate in upcoming years until innovations - such as actively managed exchange-traded funds - are developed, Mr. Keenan said. "There's only so many S&P 500 index funds that the market will bear," he said.

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