State Street Global Advisors, the Boston-based company behind the first U.S. ETF “SPY,” today launched two corporate bond ETFs – one focused on a combination of U.S. investment-grade and high-yield credits and the other focused on investment-grade corporate debt from the emerging markets.
The two funds are, and their annual expense ratios are:
- SPDR BofA Merrill Lynch Crossover Corporate Bond ETF (XOVR - News), 0.30 percent
- SPDR BofA Merrill Lynch Emerging Markets Corporate Bond ETF (Symbol:EMCD), 0.50 percent
XOVR, the U.S.-focused fund, will compete for the same investors as the iShares Baa-Ba Corporate Bond Fund (QLTB - News), an ETF that also straddles the lower end of investment-grade debt and the higher end of high-yield debt. The iShares fund, which has $10 million in assets, also has an annual expense ratio of 0.30 percent.
The other SSgA fund focused on emerging markets corporate debt, EMCD, will compete with the WisdomTree Emerging Markets Corporate Bond Fund (EMCB - News). That WisdomTree fund blazed the trail in the developing world corporate bond ETF space. The WisdomTree fund, which has almost $60 million in assets, has an annual expense ratio of 0.60 percent.
All in all, State Street is jumping into a hotbed of the ETF world. iShares has rolled out a plethora of fixed-income funds this year – the clearest reflection that fund sponsors are confident investors are open to looking for yield in new places when official short-term interest rates in much of the developing world remained pinned down at historically low levels.
The Crossover Fund
The SPDR BofA Merrill Lynch Crossover Corporate Bond ETF will track the BofA Merrill Lynch US Diversified Crossover Corporate Index. The index is designed to measure the performance of US dollar-denominated “BBB” and “BB” corporate debt publicly issued in the U.S. domestic market.
“Crossover” corporate debt generally means corporate debt rated at levels where the lower end of investment-grade debt and the higher end of high-yield debt meet, State Street said today in a press release.
Qualifying securities must be rated “BBB1” through “BB3” -- based on an average rating of Moody’s Investors Service Inc., Standard ' Poor’s Inc and Fitch, Inc. – and have a fixed-income coupon schedule, have at least one year remaining to final maturity, and a minimum amount of outstanding of $250 million or more of issuance.
Index constituents are segmented into two groups:those rated between BBB1 and BBB3, inclusive, and those rated between BB1 and BB3, inclusive.
Within these two groups, issues are capitalization-weighted and each group is assigned a 50 percent weight in the overall index - with a 2 percent cap on each issuer. As of May 31, 2012, about 3,029 securities were included in the index.
“Featuring potentially higher yields than most investment-grade bonds and potentially less credit risk than most high yield issues, demand for crossover bonds is growing among financial advisors and investors during this extended low-yield environment,” James Ross, senior managing director and global head of SPDR exchange traded funds at SSgA, said in the press release.
The Emerging Corporate Fund
The SPDR BofA Merrill Lynch Emerging Markets Corporate Bond ETF will track the BofA Merrill Lynch Emerging Markets Large Cap Senior Corporate Index. The index is designed to measure the performance of U.S. dollar-denominated emerging market corporate senior as well as secured debt publicly issued in the U.S. domestic market and the Eurobond market.
To qualify for inclusion, an issuer must have primary risk exposure to a country other than a member of the G10, which SSgA defined as Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom, and the United States. The index also precludes risk exposure to a Western European country, or a territory of the U.S.
Individual securities of qualifying issuers must be denominated in U.S. dollars, be senior or secured debt, have at least one year remaining to final maturity, a fixed coupon and $500 million or more in outstanding face value. As of May 31, 2012, about 454 securities were included in the index.
“The SPDR BofA Merrill Lynch Emerging Markets Corporate Bond ETF provides investors with an opportunity to tap into the growth potential of emerging markets while minimizing exposure to emerging market currencies,” said Ross. “As fixed-income portfolio diversification becomes a higher priority for investors, interest in emerging market bond exposure is increasing,” he said.
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