PowerShares jumps into the investment-grade international corporate bond ETF space with a product that’s a bit cheaper than a competing SSgA fund—and also a lot less focused on euro-denominated debt.
PowerShares, the Wheaton, Ill.-based fund company best known for its Nasdaq-100 ETF (NasdaqGM: QQQQ), launched an investment-grade international corporate bond ETF that will compete with a product that State Street Global Advisors rolled out two weeks ago.
The PowerShares International Corporate Bond Portfolio (NYSEArca: PICB) will undercut SSgA on price, charging 0.50 percent in annual expenses, compared with 0.55 percent for the SPDR Barclays Capital International Corporate Bond ETF (NYSEArca: IBND).
Apart from price, the biggest differences between the two are their indexes. The PowerShares fund, which is based on the S&P International Corporate Bond Index, doesn’t allow bonds denominated in any one currency to exceed 50 percent of the portfolio. SSgA’s fund, which uses the Barclays Capital Global Aggregate ex-USD >$1B: Corporate Bond Index, has no such limitation, and currently has almost 90 percent of its bonds in euros.
“That seems like a relatively meaningful difference,” said Ed McRedmond, senior vice president of institutional & portfolio strategies at Invesco PowerShares, noting that euro-denominated debt in PICB’s index is around 50 percent, with 16 percent coming from the
The fixed-income portion of the ETF world has been growing, as investors seek securities with attractive yields, increasingly outside the U.S. Official U.S. interest rates are close to zero after the Federal Reserve cut rates to stimulate an economy in its worst crisis since the 1930s. Rates remain pinned down, particularly after May’s correction that took the S&P 500 stock index down more than 10 percent and sent investors into safe-haven holdings, like Treasurys and gold.
Appetite For Nondollar Debt
“One thing we heard from a lot of investors is that they wanted to have fixed-income products that were not denominated in U.S. dollars, but tied to the local currencies to add to diversification to the portfolio,” McRedmond said. He noted that most nondollar-denominated ETFs, for now, focus on sovereign credits issued by countries, often in the emerging markets.
Apart from euro-denominated corporate debt, the new PowerShares ETF will own investment-grade corporate bonds issued in the following currencies: Australian, Canadian and
The index has almost 22 percent in pound-denominated debt issued by the
Both the PowerShares and SSgA fund will use "sampling" methodologies, meaning they won’t own all the securities in their benchmarks to achieve their index-tracking objectives.