State Street already has a pretty robust ETF lineup, including
two of the five most popular funds on the market. Still, the firm
is always looking to gain market share and hold onto its second
place position in the ETF industry, especially with Vanguard
right behind in terms of total assets.
In order to do this, State Street has launched several new
this year, competing both in terms of price and finding new
niches as well. The company's latest fund definitely falls into
the first category though, as State Street has pushed out its
very own product tracking the Russell 2000 Index (read
Time to Focus on Small Cap ETFs?
This new fund, the
SPDR Russell 2000 ETF (TWOK)
, seeks to give exposure to this popular benchmark which is
considered by many to be a barometer of small cap performance in
the U.S. market. The index is a subset of the Russell 3000 Index,
which represents approximately 10% of the total market
capitalization of the Russell 3000 Index, consisting of roughly
2,000 securities overall.
Obviously, the incredible number of holdings in the index
results in a very spread out exposure profile. No single company
makes up more than 0.33% of the product, so company specific risk
isn't an issue at all.
Investors should also note that the index is well diversified
from a sector look as well. Five sectors-tech, financials,
consumer discretionary, industrials, health care-make up more
than 10% each, while there is nice mix among growth, blend and
value too (see
Small Cap Value ETF Investing 101
This is pretty much identical to what is already on the market
in the case of both the
iShares Russell 2000 ETF (
Vanguard Russell 2000 ETF (
. Both of these products also track the Russell 2000 Index, and
have a big lead in terms of assets under management.
However, the newly launched SPDR product does have one
advantage; cost. The ETF charges investors just 12 basis points
in fees, a pretty low rate compared to 21 basis points for VTWO
and 28 for IWM.
The newly launched fund will thus look to compete on this
front, as those looking for volume will undoubtedly go to the 38
million share/day IWM or even the 40,000 share/day VTWO. Still,
due to the liquid nature of the underlying securities, bid ask
spreads shouldn't be too wide overall, so total costs shouldn't
be that much higher than the stated 12 basis point fee.
Can This Work?
This is a somewhat risky strategy though, as there is no
guarantee that investors will give up their holdings in IWM or
VTWO for the cheaper TWOK. Plus, VTWO tried to do the same thing
when it launched, and the fund has only been able to amass $230
million in assets (see
Forget SPY, Focus on Mid and Small Cap ETFs
While this is obviously a respectable figure, it is pretty
much nothing when compared to the $23.5 billion under management
by iShares' IWM. However, it is worth pointing out that the new
SPDR ETF is charging investors just half of what investors pay
for IWM, so this might be enough to entice some investors to make
We certainly saw this in the battle between
over the years in the emerging market space, as EEM was
significantly more expensive than its low-cost counterpart,
though it did have the first mover advantage. Eventually, VWO
surpassed EEM to become the top dog in the space, thanks almost
exclusively to its cheaper cost (also read
Who Says iShares ETFs Aren't Cheap?
SPDR is probably looking to replicate this success in the U.S.
small cap ETF space with its ultra-cheap TWOK. The fund certainly
has a chance to make a dent in the market, but only time will
tell if investors will embrace this fund over the other, more
popular choices already in the segment.
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Author is long IWM
ISHARS-R 2000 (IWM): ETF Research Reports
VANGD-RUS 2000 (VTWO): ETF Research Reports
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