State Street Challenges BGI with Latest ETFs

Jan.28.09 | About: SPDR Barclays (BWZ)

State Street Global Advisors' two most recently launched exchange-traded funds compete directly against funds launched by Barclays Global Investors. The SPDR Barclays Capital Short Term International Treasury Bond ETF (NYSEArca: BWZ) and the SPDR Barclays Capital Mortgage Backed Bond ETF (NYSEArca: MBG) both offer head-to-head comparisons with existing iShares. They rolled out on Tuesday.

BWZ faces off with the iShares S&P/Citigroup 1-3 Year International Treasury Bond Fund (NasdaqGM: ISHG), which launched just last Friday. BWZ and ISHG both target international investment-grade debt issued in local currencies with maturities of one to three years.

While the fund ostensibly targets developed markets, BWZ takes a far broader definition of what "developed" means than ISHG, including issues from countries like South Korea, Poland, Hungary and South Africa, which are not represented in ISHG's index. Nonetheless, Japan, Germany and Italy appear to hold the top weightings in both funds. As of Jan. 27, BWZ had 38 different holdings vs. 20 for ISHG.

The funds both charge 0.35%, so the real point of competition is most likely the markets that they cover. Investors looking for some emerging market exposure might want to consider BWZ, while those who are interested solely in a traditional definition of developed market debt will most likely look to ISHG.

"The SPDR Barclays Capital Short Term International Treasury Bond ETF expands our offerings in the burgeoning international bond category and provides investors with a new tool to add non-U.S. fixed-income exposure to their portfolios, benefit from favorable interest rates overseas, and express a view on the [U.S.] dollar," said James Ross, senior managing director at State Street Global Advisors, of his company's decision to launch BWZ.

MBG, the other ETF rolled out on Tuesday, tracks the Barclays Capital U.S. MBS Index, which covers investment grade, U.S. agency mortgage-backed securities. It must track a very similar index to the iShares Barclays MBS Bond Fund (NYSEArca: MBB). MBG's benchmark is more diverse, tracking 1,700 components, while MBB's has closer to 400. Both portfolios are heavily optimized, however: MBG holds 14 securities, while MBB's portfolio holds 18.

The iShares fund, which was launched back in the first half of 2007 and has assets of more than $950 million, carries an expense ratio of 36 basis points, while MBG charges just 20 basis points. Given that these are highly similar funds, the lower expense ratio could give the SPDR fund the edge in attracting incoming assets going forward.

You can view the prospectus for BWZ and MBG here.