The chart below shows the replication percent for 10 of the 15 revamped SSGA funds and their competitors.
** SPDW, IEFA, VEA, SCHF
*** SPMD, VXF
For a larger view, please click on the image above.
SSGA has optimized heavily in developed markets ex-U.S., emerging markets and the U.S. investment-grade bond market, and moderately in U.S. small and midcaps. While these markets can be tough liquidity-wise, SSGA’s competitors have managed to achieve near-complete replication in most of them.
At this time, the newly revamped SPDR Portfolio funds have much lower asset bases than their competitors. It’s entirely possible that SSGA will be able to increase the replication percentage in challenging markets if the fee cut attracts new assets. This is precisely what happened with the iShares MSCI Emerging Markets ETF (EEM) as it grew. But for now, investors face some cost uncertainty because of the tracking difference that grows alongside optimization.
Anyone who is seriously considering a switch to one of the rebranded, newly cheap SPDR Portfolio funds risks losing out—on the trading floor and in the portfolio manager’s office. The bet may well pay off, especially if assets flow in and push volumes up, spreads down, replication higher and tracking tighter in their wake. Today, with relatively high TACOs driven by trading costs and notable tracking risk generated by optimization, this is a bet, not a certainty. Whatever you do, don’t just look at the expense ratio. That could be tragically short-sighted. There’s no substitute for in-depth, bottom-up ETF due diligence.
At the time of writing, the author held VXF, but in mutual fund format. Elisabeth Kashner is the director of ETF research and analytics for FactSet.