A significant portion of the growth in ETF assets in recent years has been attributable to bond ETFs, which saw cash inflows of $42 billion in 2009 and more than $11 billion through the first four months of 2010. Despite this surge in popularity and the importance of the fixed income asset class in portfolio allocation, the bond ETF universe remains relatively limited. There are currently just over 100 fixed income ETFs (compared to more than 700 equity funds).
That number grew by one this week when State Street launched the SPDR Barclays Capital International Corporate Bond ETF (IBND). The new ETF will track the Barclays Capital Global Aggregate ex-USD > $1B: Corporate Bond Index, becoming the first ETF to offer global exposure to corporate bonds. There are currently a handful of ETFs offering exposure to corporate bonds, including investment grade debt issues and those in “junk” status. And there are several ETFs offering exposure to international debt, including those in the emerging markets bonds and international government gonds categories. But IBND is the first to offer exposure to global corporate debt markets.
Under the Hood
IBND has approximately 88 holdings, representing a fraction of the underlying index. Because many of the individual components of bond benchmarks can be illiquid, bond ETFs often use a sampling strategy in their attempt to replicate the underlying index. Because the impact of changes in interest rates and other factors on bond prices are generally predictable, ETFs utilizing sampling techniques are often able to generate minimal tracking error.
From a country perspective, IBND’s largest allocations are to the US (17.5%), Germany (16.1%), and the United Kingdom (12.5%). Because the new ETF maintains significant exposure to eurozone countries (France, Italy, the Netherlands, and Spain also receive moderate allocations), it figures to see a fair amount of activity in its first few weeks of trading. In recent weeks, fixed income ETFs with exposure to European Treasuries have sunk as concerns about a fiscal crisis escalate; the Barclays Capital International Treasury Bond ETF (BWX) has lost about 4% over the last month.
IBND limits its holdings to securities that maintain an investment grade rating from at least two of the three major ratings agencies; about 85% of assets are rated “A” or higher with the remainder garnering a “Baa” rating. IBND is tilted towards the short end of the maturity ladder; about 70% of assets mature in five years or less, and the fund’s modified adjusted duration is 4.4 years.
IBND charges an expense ratio of 0.55%.
Disclosure: No positions