SSgA’s new investment-grade international corporate bond fund will enjoy first-to-market status, but will the heavy concentration on euro-denominated debt give investors pause?
State Street Global Advisors, the world’s second-biggest ETF firm, launched the first international investment-grade corporate bond ETF available in the U.S., with almost 90 percent of the fund’s current holdings in euro-denominated debt.
The SPDR Barclays Capital International Corporate Bond ETF (NYSEArca: IBND) will cost investors 0.55 percent a year.
Yesterday, PowerShares filed papers with the Securities and Exchange Commission to launch a competing product. PowerShares plans to undercut SSgA on price, charging just 0.50 percent in annual expenses, but it could be months before its product comes to market.
The fixed-income portion of the ETF world has been growing recently, 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. About 48 percent of the global corporate debt market is outside the U.S., compared with about 55 percent for the global equities market.
“It’s the equities story all over again,” Tom Anderson, a vice president and head of strategy and research at Boston-based SSgA, said in a telephone interview. “Wouldn’t you want to participate in the corporate bond opportunities outside the U.S.? That’s the premise.”
The SSgA fund is based on the Barclays Capital Global Aggregate ex-USD >$1B: Corporate Bond Index, which focuses only on securities with at least $1 billion in market capitalization outstanding.
“The intent is that this would be a highly liquid index,” Anderson said. “That’s the reason for the billion-dollar capping,” he said, noting that buying and selling bonds from larger companies will be relatively easy. He added that the index the ETF is based on is a subset of the Barclays Global Aggregate Index, perhaps the most well known of existing broad bond market benchmarks.
From a currency perspective, the fund’s holdings are about 89 percent euro-denominated, with about 8 percent in British pounds and 3 percent in Japanese yen, Anderson said.
The top five countries in the current mix are Germany, at 18 percent; U.S. companies issuing nondollar-denominated debt, also at almost 18 percent; France at 12 percent; the U.K. at 10 percent and the Netherlands at 9 percent, he said.
He said the ETF index’s yield spread over an international Treasurys benchmark is 1.40 percent, or 140 basis points. One-hundred basis points are equal to 1 percentage point. That compares with a spread of 115 basis points at the beginning of the year—a change that tells the tale of Europe’s fiscal crisis that began in earnest in January.