SSgA’s Int’l Corporate Bond ETF First To Market

May 20, 2010

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.

Currency Risk

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.


“If you’re a U.S. investor, you’re thinking about credit quality, which is high,” Anderson said, referring to the relatively large and stable issuers that the new ETF will focus on. “But there’s also currency exposure, and that can be a positive and a negative. An investor in this fund would want to have a view on the euro and the dollar.”

A falling euro will hurt returns in the fund, while a euro recovery will boost results.

The index fell more than 4 percent over the first four months of 2010, but over the trailing three years through April 30, 2010, it returned 5.20 percent per year.

The Competition

The launch of SSgA’s fund comes a day after PowerShares filed to seek approval for a competing international, investment-grade bond market index. Anderson said SSgA hopes to benefit from IBND’s first-to-market status, a position that historically has given ETF issuers a leg up on the competition in the asset-gathering game.

The proposed PowerShares International Corporate Bond Portfolio (NYSEArca: PICB) will seek to own investment-grade corporate debt from non-U.S. issuers in the following currencies: euros; Australian, Canadian and New Zealand dollars; British pounds; Japanese yen; Swiss francs; Danish and Norwegian krone; and Swedish krona.

PowerShares didn’t specify the exact breakdowns in its filing.

Both SSgA’s “IBND” and PowerShares planned fund, “PICB,” employ sampling strategies that don’t require the two to buy all the securities in their underlying indexes.

SSgA’s IBND will also be allowed to invest in securities that aren’t included in the index, such as futures, options, swap contracts and other derivatives, cash and cash equivalents or money market instruments.

Anderson said IBND’s launch is part of his company’s strategy to build out its line of international bond ETFs, and comes at a time when the ETF structure is giving investors the ability to access specific areas of the bond market that weren’t accessible previously.

“Investors can use ETFs to disaggregate the aggregate,” Anderson said.


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