BGI Versus SSgA: Battle of the Muni Bond ETF Titans

Just substitute Barclays Global Investors [BGI] and State Street Global Advisors [SSgA] for Annie Oakley and Frank Butler in the old Irving Berlin classic and you will have a better understanding of the drama unfolding as these powerhouses launch their competing municipal bond ETFs. Yes, I used drama and ETFs in the same sentence. How else would you explain recent events?

It all started with Barclays' filing on July 3, which was followed by State Street's filing on July 13. Not to be outdone, Van Eck and PowerShares submitted subsequent filings on July 20 and July 25, respectively. Ironically, even though PowerShares was last to file, they were first to issue a press release on August 7, which stated their intent to list the first family of municipal bond ETFs with an anticipated trading date in October.

This brings us back to the Barclays/State Street saga. State Street telegraphed their anticipated launch date on August 23 by scheduling a September 13 webcast on the advantages of using municipal bond ETFs for financial intermediaries. By disseminating the invitation and scheduling the webcast, State Street was confident the product would launch on or before September 13. The gauntlet was thrown down.

Barclays now faced a mad dash to the finish line or they would risk another GLD vs. IAU debacle, which at last count stood at $12.8 billion to $1.1 billion, thanks in part to a full two-month, first-to-market advantage by State Street. As it turns out, Barclays is indeed first to market in the muni bond space with MUB. That's the good news. The bad news is they have a four-day advantage, which withers in comparison with the lead time enjoyed by GLD.

So Barclays beat you to market, State Street. What are you going to do about it? You're going to undercut Barclays' by 20%? Brilliant! State Street took a page out of Barclays' playbook and implemented their own fee waiver. While both products have management fees of 30 basis points, Barclays' fee waiver brings them down to 25 basis points, while State Street's fee waiver brings them down to 20 basis points. The price cut effectively negates the four-day first-to-market advantage. Furthermore, State Street's fee waiver is in effect until September 11, 2008. As you may recall from my previous article, Barclays' fee waiver is set to expire on June 30, 2008. This is another brilliant move by State Street, which puts further pressure on Barclays to either extend or make permanent their fee reductions.

But the one-upmanship is not over. Barclays fired back yesterday by announcing a webcast of its own. The date? Well, you guessed it —September 13. Barclays will be having two webcasts at 11:00 a.m. EST and at 4:00 p.m. EST, the latter competing directly with State Street's webcast at 4:00 p.m. EST. Who says this isn't personal?

Barclays' rush to beat State Street explains the disappointing lack of supporting documentation from the marketing department at launch. However, now that the fund is actively trading, we have the following information available:

• Weighted average credit quality: AAA/AA
• Percentage of the portfolio that is comprised of insured municipal bonds: 67.5%
• Weighted average maturity: 15.6 years
• Effective duration: 6.7
• Average yield to maturity: 4.0%

I'll let you draw your own conclusions from the above figures, but I think it's clear that we need to focus on the average weighted credit quality of the fund and not the corresponding index's credit threshold. Once State Street's offering hits the market, I will be able to provide the same information for their fund. At launch, it looked as though MUB would be yielding around 4.42%, but we'll have to see if that preliminary estimate pans out once the number of the underlying holdings expand. While I still think Barclays' offering has the edge over State Street's, the winner will be selected by the marketplace, which will focus on yield, cost and spreads.

As an aside, I do feel that these ETFs will change the municipal bond landscape. Take a step back and think about it. Up until now, the overwhelming majority of municipal bond buyers purchase their holdings at issuance and hold them until maturity. All the activity is centered around the issuance, so there hasn't been a distinct need for an orderly market to provide interim liquidity. With the launch of these municipal bond ETFs, the creation/redemption process will provide a great deal of liquidity for those bonds fortunate enough to be in the baskets. I think this demand for liquidity will undoubtedly spill over, and the asset class as a whole will become more efficient over time. Keep in mind that we are making a big deal over a 5 basis-point differential in management fees, while the Bond Market Association maintains this stance in regard to municipal bond transaction costs:

"When an individual investor buys or sells highly rated, easily traded municipal bonds in the secondary market, transaction costs are generally somewhere between 1/2% to 3%."

A friend recently reminded me of a fixed-income session we both attended during the World Series of ETFs a number of years ago. Since no one is omniscient, I'll refrain from disclosing the panelists that declared in unanimity, "We will never see a municipal bond ETF."

Written by Rudy Aguilera

Rudy Aguilera is a founding principal with Helios, an independent fee-only Registered Investment Advisor based in Orlando, FL.