State Street, the Boston-based ETF issuer behind some of the
country’s most popular exchange-traded products is back debuting
more funds, launching two more ETFs earlier this week. For the most
part the firm has been focused on equity and multi-asset funds so
far in 2012, but appears to be at least temporarily shifting its
focus back to the fixed income market.
These launches mark just the second and third bond ETFs from the
company this year but come after a wave of other fixed income
products have hit the market from various other issuers. This could
suggest that the focus in the ETF industry is beginning to shift to
fixed income for the time being, and especially towards more novel
or niche products (see Play Europe with This ETF Pair Trade).
State Street’s launch could be a great example of that since
both funds provide exposure to segments which are often overlooked
by ETF investors; the crossover segment of the bond market, and the
emerging market corporate debt space. Below, we briefly highlight
some of the key points from this release for investors interested
in possibly drilling down further in the fixed income segment of
their portfolios:
SPDR BofA Merrill Lynch Crossover Corporate Bond ETF
(XOVR)
This product tracks the BofA Merrill Lynch US Diversified
Crossover Corporate Index which is a broad benchmark of U.S. dollar
denominated debt that is currently rated in the ‘BBB’ to ‘BB’
range. Qualifying securities must have at least one year to
maturity, be fixed coupon paying bonds, and have a minimum
outstanding of $250 million (read Three Bond ETFs For A Fixed
Income Bear Market).
State Street believes that this range from ‘BBB’ to ‘BB’ rated
securities is the bond market’s ‘sweet spot’, consisting of notes
that often times straddle the line between investment grade and
junk. Sometimes, the bonds can even be rated junk by one agency and
investment grade by another, while others can ‘crossover’ from one
camp to another, hence the name ‘crossover bonds’.
The firm also believes that this space offers a nice mix between
yield and risk, focusing on the lower rated securities in the
investment world and the higher rated ones in the junk space.
Furthermore, duration is also a medium risk factor for many of the
securities so interest rate sensitivity shouldn’t be too bad for
the overall portfolio.
Lastly, since the product offers such mixed exposure, State
Street also claims that the market may reduce the need to rebalance
among the various types of corporate bonds as it represents a
relatively stable bridge between the two well-known groups of
investment grade and junk (see Are The Fundamental Bond ETFs Better
Fixed Income Picks?).
The product also looks to charge investors just 30 basis points
a year in fees, which is in-line with other products in the bond
space, although it is higher than some of the less specialized
funds out there. In terms of the index, industrial bonds dominate,
while the average yield to worst is a respectable 4.8%.
SPDR BofA Merrill Lynch Emerging Markets Corporate Bond
ETF (EMCD)
This product has a much broader focus than its crossover
counterpart, instead seeking to provide exposure to a broad range
of corporate securities from various emerging markets around the
globe. This is done by following the BofA Merrill Lynch Emerging
Markets Diversified Corporate Index which a benchmark of developing
market corporations that have issued dollar-denominated debt (also
see Go Local With Emerging Market Bond ETFs).
To be included in the benchmark, the issuer must primarily be
exposed to a nation outside of the FX G10, Western Europe, or
American/European territories. Securities lower than “CC” are also
removed, while bonds must have at least one year to maturity and
have at least $500 million in outstanding face value.
In total, the underlying index has about 450 securities in its
basket, and it has a modest yield to worst of roughly 5.4%. Total
costs for the fund come in at 50 basis points a year, while no one
security makes up more than 1.2% of the underlying index (read Van
Eck Debuts Emerging Markets High Yield Bond ETF).
Exposure from a country perspective is focused on Brazil
(19.7%), and Russia (15.2%), while Mexico (11%), UAE (6.6%), and
South Korea (6.0%), round out the top five. China and India only
combine to make up 8.3% of the total, a surprisingly small number
that is actually overshadowed by combined holdings in Qatar and the
UAE.
ETF Competition
For EMCD, the competition looks to be quite fierce in the
emerging market bond ETF space. Currently, there are a host of
competitors including two funds that have U.S. dollar denominated
emerging market debt and more than $1.8 billion in AUM each.
Given this, the new State Street fund may have a difficult time
in terms of accumulating assets off the bat, but the fund’s
counterpart in the local bond space, EBND, has had great success so
far, accumulating $190 million since its inception in February of
2011 (Read ProShares Debuts USD Covered Bond ETF).
XOVR is a bit of a wildcard, however, as the ETF space for
crossover bonds is quite sparse. There is one product though that
could be a foe, the iShares Baa-Ba Corporate Bond Fund
(QLTB).
This product, which debuted in April of this year, charges
investors 30 basis points a year in fees and has a similar focus on
low rated investment grade debt and high rated junk securities.
Yet, it has only accumulated $10 million in assets since its launch
and sees volume of less than 10,000 shares a day.
This suggests that if there is enough interest from investors in
the space, we could see XOVR pose as a big threat to QLBT in this
niche of the bond world. Also importantly, it helps State Street
keep pace with its competitors in the ETF world and prevent the
company from falling behind in the fixed income market, something
that arguably hasn’t been the strongest part of its product mix but
could be an increasingly decisive aspect of issuers’ lineups going
forward.
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(EMCD): ETF Research Reports
ISHARS-BAA BARC (QLTB): ETF Research Reports
(XOVR): ETF Research Reports
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