PowerShares, the Wheaton, Ill.-based fund company best known for
its Nasdaq-100 ETF (NasdaqGM:QQQQ), launched an investment-grade
international corporate bond ETF that will compete with a product
that State Street Global Advisors rolled out two weeks ago.
The PowerShares International Corporate Bond Portfolio
(NYSEArca:PICB) will undercut SSgA on price, charging 0.50 percent
in annual expenses, compared with 0.55 percent for the SPDR
Barclays Capital International Corporate Bond ETF
Apart from price, the biggest differences between the two are
their indexes. The PowerShares fund, which is based on the S&P
International Corporate Bond Index, doesn't allow bonds denominated
in any one currency to exceed 50 percent of the portfolio. SSgA's
fund, which uses the Barclays Capital Global Aggregate ex-USD
>$1B:Corporate Bond Index, has no such limitation, and currently
has almost 90 percent of its bonds in euros.
"That seems like a relatively meaningful difference," said Ed
McRedmond, senior vice president of institutional & portfolio
strategies at Invesco PowerShares, noting that euro-denominated
debt in PICB's index is around 50 percent, with 16 percent coming
from the Netherlands and 10 percent from France.
The fixed-income portion of the ETF world has been growing, 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. Rates remain pinned down,
particularly after May's correction that took the S&P 500 stock
index down more than 10 percent and sent investors into safe-haven
holdings, like Treasurys and gold.
Appetite For Nondollar Debt
"One thing we heard from a lot of investors is that they wanted
to have fixed-income products that were not denominated in U.S.
dollars, but tied to the local currencies to add to diversification
to the portfolio," McRedmond said. He noted that most
nondollar-denominated ETFs, for now, focus on sovereign credits
issued by countries, often in the emerging markets.
Apart from euro-denominated corporate debt, the new PowerShares
ETF will own investment-grade corporate bonds issued in the
following currencies:Australian, Canadian and New Zealand dollars;
British pounds; Japanese yen; Swiss francs; Danish and Norwegian
krone; and Swedish krona.
The index has almost 22 percent in pound-denominated debt issued
by the U.K., making it the single-biggest country exposure, but, as
noted above, euro-denominated debt constitutes the single-largest
Both the PowerShares and SSgA fund will use "sampling"
methodologies, meaning they won't own all the securities in their
benchmarks to achieve their index-tracking objectives.
McRedmond stressed that a good part of product development is
focused on assuring that any index that PowerShares uses to build
an ETF on is "investable," meaning managers can make any necessary
changes to their holdings without paying an inordinate fee to buy
or sell securities.
"We make sure our portfolio managers are not going to have a
difficult time managing against that index, and also that it has
some degree of scale to it-that there's going to be a meaningful
amount of assets that can come into it without having a significant
impact on the underlying securities," McRedmond said.
SSgA designed its corporate bond ETF with the same focus on
liquidity, according to Tom Anderson, a vice president and head of
strategy and research at the Boston-based firm.
"The intent is that this would be a highly liquid index. That's
the reason for the billion-dollar capping," Anderson said in a
recent interview, noting that buying and selling bonds issued by
larger companies will be relatively easy.
The Barclays Capital Global Aggregate ex-USD >$1B:Corporate
Bond Index, around which the SSgA ETF is designed, focuses only on
securities with at least $1 billion in market capitalization
The S&P International Corporate Bond Index has an extra 1.4
percentage points in yield, or spread, over five-year Treasurys,
according to PowerShares.
The yield spread SSgA's "IBND" has over an international
Treasurys benchmark that's comparable to the fund is also 1.40
percent, or 140 basis points, according to Anderson. 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. One hundred basis points is equal to 1
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