PowerShares Launches Fixed Income ETFs

October 11, 2007

In one launch, PowerShares covers emerging market debt, Treasuries and muni bonds. 

PowerShares launched five new fixed-income exchange-traded funds (ETFs) on the American Stock Exchange today, putting it directly into the municipal bond ETF competition and also making it the first ETF provider to offer exposure to emerging market debt. The new products are PowerShares' first fixed-income ETFs.

The three municipal bond ETFs make PowerShares just the third ETF provider to enter that arena, although at least one more is coming. The PowerShares Insured National Municipal Bond Portfolio (PZA), PowerShares Insured California Municipal Bond Portfolio (PWZ), and PowerShares Insured New York Municipal Bond Portfolio (PZT) go up against offerings from Barclays Global Investors (BGI) and State Street Global Advisors (SSgA). Both competitors offer broad market ETFs, and BGI has already come out with ETFs covering the New York and California muni bond markets. State Street will likely launch its own New York and California muni bond ETFs soon.

The PowerShares muni bond ETFs are unique in that they include only insured debt, mitigating credit risk at the possible expense of a small slice of yield. Also, the New York and California funds also include issues from Puerto Rico, since municipal debt from Puerto Rico is tax-exempt for all U.S. residents. The funds each have an expense ratio of 0.28% versus 0.25% for the BGI ETFs and 0.20% for SSgA's fund.

Although ETFs tracking Treasury bond performance are not a rarity, the PowerShares 1-30 Laddered Treasury Portfolio (PLW) is the first Treasury ETF to use a laddered strategy in which, ideally, the portfolio holds 30 different U.S. Treasury issues with fixed coupons, with one issue reaching maturity each year. PLW has an expense ratio of 0.25%.

Finally, the launch of the PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) is the first of its kind. Although SSgA launched an international treasury ETF earlier this week which included some issues from emerging markets, the PowerShares product is the first ETF to focus exclusively on emerging market sovereign debt. PCY's expense ratio is the highest of PowerShares' fixed income ETFs at 0.50%, in line with SSgA's SPDR Lehman International Treasury Bond ETF (BWX).

With these launches, PowerShares is winding down its rapid-fire U.S. expansion, which has lasted a little over a year and seen the introduction of more than 100 ETFs. The company says it will now concentrate more on building assets in its existing funds than launching more funds, although it will continue to do so on an opportunistic basis. The ETF provider will also turn its attention to Europe, where it is expected to expand soon. (Read the story here.)

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