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 ETFs 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 (IWM) and the Vanguard Russell 2000 ETF (VTWO). 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 the switch.
We certainly saw this in the battle between EEM and VWO 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