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• What’s Up With Banks?
• The KBW Index Shuffle

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State Street Global Advisors, the No. 2 U.S. exchange-traded fund firm, changed indexes on Monday on five of its ETFs from benchmarks provided by KBW to a quintet from Standard ' Poor’s in a shift that belies a bit of intrigue involving Invesco PowerShares.

Indeed, four of the KBW indexes SSgA is dropping will be going to four new ETFs PowerShares plans to roll out Nov. 1. One industry source told IndexUniverse that SSgA sped up the transition to the new indexes before the launch date of the PowerShares funds—a move PowerShares hoped to block, possibly with legal action.

Officials at both companies declined to comment on the timing and legal issues surrounding the index changes and the PowerShares fund launches.

An SSgA official said his Boston-based firm made the changes to line up the indexes on the five finance-related ETFs with its other sector funds, all of which are based on S'P indexes. He said the average number of holdings across the five affected ETFs rose to 47 from 29 under the KBW indexes, meaning the newly constituted ETFs are more diversified than before.

Wheaton, Ill.-based PowerShares was meanwhile interested in expanding its relationship with Keefe, Bruyette 'Woods and taking advantage of its KBW lineup of finance-specific indexes. PowerShares has a few products using KBW products, including the $21.7 million KBW High Dividend Yield Financial Portfolio (NYSEArca:KBWD).

SSgA said in a press release today that its five funds will retain their tickers, but that the company renamed the funds, replacing the word “KBW” with the word “S'P.” Their new names and approximate assets are:

• SPDR S'P Bank ETF (NYSEArca:KBE), $1.15 billion
• SPDR S'P Capital Markets ETF (NYSEArca:KCE), $30.4 million
• SPDR S'P Insurance ETF (NYSEArca:KIE), $113.3 million
• SPDR S'P Mortgage Finance ETF (NYSEArca:KME), $3.2 million
• SPDR S'P Regional Banking ETF (NYSEArca:KRE), $47.1 million

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The new and old indexes on the SSgA funds are:

• KBE:S'P Banks Select Industry Index in place of the KBW Bank Index
• KCE:S'P Capital Markets Select Industry Index in place of the KBW Capital Markets Index
• KIE:S'P Insurance Select Industry Index in place of the KBW Insurance Index
• KME:S'P Mortgage Finance Select Industry Index in place of the KBW Mortgage Finance Index
• KRE:S'P Regional Banks Select Industry Index in place of the KBW Regional Banking Index

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Tax Consequences?

Industry sources said one consideration investors in the SSgA funds might not have been fully aware of is that the index changes required rebalancing and even reconstitution, which could leave ETF shareholders with tax consequences.

That doesn’t necessarily mean an unexpected tax bill; the changes could leave some investors holding the funds in taxable accounts with losses to harvest at tax time. It would all depend on the holding periods and the cost bases. Some tax consequences could also be smoothed at the fund level.

The SSgA official declined to discuss the tax consequences of the changes, saying it wasn’t yet appropriate considering all the variables involved. But he did say that the reconstitution and rebalancing was mostly about adding new securities and trimming weightings of existing holdings, rather than completely eliminating certain stocks.

One industry source said that of the five SSgA ETFs undergoing index changes, KRE faced the biggest changes, with more than a third of the portfolio needing to be reconstituted to match its new index.

The SSgA official said all the variables of the reconstitutions and rebalancing weren’t immediately at his disposal, but reaffirmed that all the reconstitutions were more about adding new constituents and trimming existing ones rather than dumping stocks that were part of the old index.

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KRE Redemptions

KRE also happens to be one of the more heavily shorted ETFs in the market, and the index change almost certainly created additional challenges to short-sellers or to parties lending KRE shares to short-sellers.

When we last looked at short interest at the end of September, KRE had 2.5 times as many shares short than shares long, putting it on IndexUniverse’s “Very Very Short” list.

Creation and redemption activity on Friday tracked by IndexUniverse provided some clues as to how investors were preparing for the change. For example, on Oct. 21, the trading day before the index changes, investors yanked $58 million out of KRE—a sum that amounted to 11 percent of the fund’s outstanding shares.

At the same time, KBE, the $1.15 billion fund now called the SPDR S'P Bank ETF, had creations last Friday of almost $89 million, amounting to 8 percent of the portfolio.

It wasn’t immediately clear if those sizable creations had anything to do with the index change on the ETF.

The PowerShares Gambit

While it’s clear that PowerShares was seeking KBW’s expertise in the realm of finance-industry indexation, it’s not at all clear that it will have the same good fortune SSgA has had in attracting assets to the funds it hopes to roll out on Nov. 1.

Industry sources say it’s tickers people remember, and not indexes.

So, even though the five SSgA funds are not the same as they were last Friday, they still have the same tickers, which isn’t a trivial advantage in the increasingly competitive world of ETF marketing.

PowerShares said in a press release that the four PowerShares finance-related ETFs and their indexes are:

• PowerShares KBW Bank Portfolio (NYSEArca:KBWB), which is based on the KBW Bank Index
• PowerShares Regional Banking Portfolio (NYSEArca:KBWC), which is based on the KBW Regional Banking Index
• PowerShares Capital Markets Portfolio (NYSEArca:KBWC, which is based on the KBW Capital Markets Index
• PowerShares Insurance Portfolio (NYSEArca:KBWI), which is based on the KBW Insurance Portfolio Index

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Tellingly, PowerShares said in its press release that the funds’ old tickers were the tickers that SSgA used when its ETF were based on the KBW indexes.

It’s worth repeating that SSgA is still using those same tickers in the reconstituted SPDR funds that are now based on S'P indexes.

First There Was The ‘Ticker Tangle’

Interestingly, this isn’t the first time SSgA and PowerShares have mixed it up over the marketing of their ETFs.

SPDR, the trademark holder of SSgA tickers, sued PowerShares in July 2010 for too closely copying SSgA tickers on a lineup of nine small-cap sector funds PowerShares had launched.

For example, the PowerShares S'P SmallCap Financials ETF (NasdaqGM:PSCF) was originally trading under the ticker “XLFS”—bearing more than a passing resemblance to “XLF,” the ticker of SSgA’s nearly $5 billion Financial Select Sector SPDR Fund (NYSEArca:XLF).

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