Daily ETF Watch: MBS Fund Debuts

FlexShares to roll out a new MBS-focused ETF, while Exchange Traded Concepts plans to launch an EM Internet fund.

FlexShares, Northern Trust’s ETF unit, today is rolling out an ETF that seeks to capture the performance of the mortgage-backed pass-through securities space, according to a Nasdaq communique and the fund’s latest updated prospectus.

The FlexShares Disciplined Duration MBS Index Fund (MBSD) will invest in pass-through securities that have been issued by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation or the Government National Mortgage Association, the prospectus said. The “pass-through” securities are backed by pools of fixed-rate mortgages. The fund tracks the BofA Merrill Lynch Constrained Duration US Mortgage Backed Securities Index.

Component MBSs in the underlying index must have at least one year to maturity and be issued by a U.S. agency; they must also meet size requirements and be representative of the 15-, 20- or 30-year mortgage programs. According to the prospectus, the index will have an average effective duration of 3.25 to 4.25 years.

The fund’s biggest competition will come from two more established ETFs offered by iShares and Vanguard. The $6 billion iShares MBS ETF (MBB | A-98) and $542 million Vanguard Mortgage-Backed Securities ETF (VMBS | A-87) both track MBS indexes provided by Barclays

MBSD comes with an expense ratio of 0.20 percent, or $20 for each $10,000 invested; while MBB charges 0.27 percent. VMBS is the cheapest in the space, charging 0.12 percent.

ETC Plans EM Internet Fund

Exchange Traded Concepts has filed for a first-of-its-kind broad-based ETF that offers a unique slice of emerging markets. Still, the KraneShares CSI China Internet ETF (KWEB | B-23) is plying the same traffic, but solely through the Internet-focused lens of the world’s No. 2 economy.

The EMQQ Emerging Markets Internet Index ETF (EMQQ) will target companies whose primary business is e-commerce or Internet-related activities and which either own most of their assets or generate most of their revenues in emerging markets, the prospectus said.

The index can include companies engaged in Internet-related services, retail activities, broadcasting and media activities, as well as companies focused on providing online advertising and online travel services, search engines and social networking, according to the prospectus.

The filing identifies 26 emerging and frontier markets where components must either own the majority of their assets or generate the majority of their revenues.

The list includes large developing countries like China and India, but also smaller countries like the Philippines and United Arab Emirates. The prospectus warns that the index can become heavily concentrated in one or just a few countries, and notes that as of the filing date, China companies represented a “significant” percentage of the index.

Alibaba IPO Casts Shadow

The dominance of China raises an interesting point. The world’s largest e-commerce company, China-based Alibaba Group, is set to have its initial public offering (IPO) early next week, with plans to list on the New York Stock Exchange later in the month.

Media industry sources put the company’s value at as much as $200 billion and suggest that the IPO could rival Facebook’s in terms of money raised. Obviously, the IPO and the breathtaking growth of the company sponsoring will also likely draw further investor attention to Internet-focused companies operating in and serving emerging markets.

EMQQ’s underlying index caps the weight of individual components at 8 percent during semiannual rebalances, so a single company won’t run away with the index. However, there’s no mention of whether there are any caps on individual country weights. If China is already a sizable presence in the index, Alibaba’s IPO likely will just add to that.

The filing did not include an expense ratio or mention where the fund would have its primary listing.