State Street Global Advisors (SSgA) will launch six new exchange-traded funds (ETFs) onto the American Stock Exchange (AMEX) this morning, as it continues the aggressive expansion of its ETF line-up.
The funds include five SPDR-branded sub-industry ETFs tied to indexes from Standard and Poor's (S&P), and a regional banking ETF tied to the Keefe, Bruyette and Wood's (KBW) Regional Banking Index. The funds are:
SPDR Metals & Mining ETF (XME)
SPDR Oil & Gas Equipment & Services ETF (XES)
SPDR Oil & Gas Exploration & Production ETF (XOP)
SPDR Pharmaceuticals ETF (XPH)
SPDR Retail ETF (XRT)
streetTRACKS KBW Regional Banking ETF (KRE)
SSgA, like other ETF providers, has moved aggressively into the sub-industry space over the past eight months. In November 2005, SSgA launched three ETFs tied to KBW's Banking (KBE), Capital Markets (KCE) and Insurance (KIE) indexes. Those funds currently have $138 million, $49 million and $20 million in assets, respectively.
The company then kicked off its line of SPDR-branded sub-industry funds in January 2006, launching three funds tied to S&P's Biotech (XBI), Homebuilders (XBH) and Semiconductor (XSD) indexes. Those SPDR-branded funds have been slow starters, pulling in just $20 to $50 million each. They have suffered from unfortunate timing on the performance front: the biotech ETF is off more than 9 percent since inception, the Homebuilders fund is down a stunning 21 percent, and the Semiconductor fund is down nearly 7 percent. Those returns are no fault of SSgA - the three sectors have simply fallen on hard times - but it is hard to attract assets when you're losing money every day. (Of course, the contrarian in me says it may be a good time to buy!)
SSgA clearly believes there's long-term life in the sub-industry space, however, and they're moving aggressively to capture that area. The newest funds target some of the more closely watched areas of the market, and could well find an audience with investors.
"Investors are increasingly looking beyond traditional sector investing as a means of gaining exposure to the more granular sub-industries," says David Blitzer, managing director and Chairman of the Index Committee at Standard & Poor's. "The new S&P Select Industry indices offer investors the unprecedented ability to accurately target exposure to specific industries."
These launches are just the tip of SSgA's expansion plans, too. According to this filing, SSgA is planning SPDR-branded sector portfolios tied to: Aerospace & Defense, Building & Construction, Computer Hardware, Computer Software, Health Care Equipment, Health Care Services, "Leisuretime," Outsourcing & IT Consulting, Telecom and Transportation. They're also planning a Mortgage Finance fund tied to yet another KBW index.
But SSgA isn't the only one targetting the sub-sector space. PowerShares currently offers twenty sector and sub-sector funds, and Barclays Global Investors (BGI) recently launched ten sub-sector ETFs tied to indexes from Dow Jones.
SSgA has a marked advantage in one area, of the competition however: Their funds offer the lowest expense ratios of any sub-sector funds at just 35 basis points. By contrast, PowerShares charges 60 basis points, while BGI saddles investors with fees of 48 basis points. That could be a deciding factor for some investors.
S&P's Select Industry Indexes
It won't be the only factor, however. The sub-industry space is clearly one area where the choice of index matters ... a lot.
The SPDR-branded S&P Select Industry Indexes, for instance,are somewhat unusual, and provide markedly different exposure from the indexes used by PowerShares and BGI . The SPDR indexes are equal-weighted indexes of at least 21 stocks. If there are not 21 stocks in a given sub-sector, S&P poaches "large stocks from relevant, highly correlated supplementary sub-industries" to round out the index.
The equal-weighting methodology really sets the SSgA funds apart from competing products. With BGI's sub-sector funds, it is not uncommon to have one or two large-cap names make up 20-40 percent of the index. In the SSgA funds, they make up less than 10 percent.
For instance, in the iShares Dow Jones U.S. Oil Equipment and Services ETF (IEZ), Halliburton and Schlumberger currently make up over 27 percent of the index. In SSgA's SPDR Oil and Gas Equipment & Services ETF (XES), they make up just 6.7 percent of the index. (In the similar PowerShares fund (PXJ), which uses a quantitatively screened portfolio in an attempt to outperform the market, those two names make up slightly less than 10 percent of the index.)
As with all equal-weighted funds, the SSgA funds will skew towards small and mid-cap performance. The funds do have a minimum makret capitalization screen, however, and only hold companies with market caps over $500 million.