PowerShares Joins Int’l Corp. Bond Fund Fray
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 (NYSEArca:IBND).
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 currency exposure.
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 outstanding.
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 percentage point.
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