State Street Global Advisors (SSgA) launched its own high-yield bond exchange-traded fund on Monday, becoming the third company to issue a high-yield bond ETF in the past twelve months. The SPDR Lehman High Yield Bond ETF trades on the American Stock Exchange under the cute ticker symbol “JNK.”
The new fund will go head-to-head with two competitors, the PowerShares High Yield Corporate Bond Portfolio (AMEX: PHB) and the iShares iBOXX $ High Yield Corporate Bond Fund (AMEX: HYG). And as the chart below shows, it offers some real competition.
Of course, it remains a question how well each fund will track its index. The bond market can be illiquid, and there are important differences between how each fund gains exposure through the creation/redemption process. The iShares and PowerShares funds do in-kind creations, meaning that institutional investors must gather up the underlying portfolio of junk bonds and deliver them to the ETF manager to create new shares of the ETF. In contrast, the SSgA fund does cash creations and redemptions—institutional shareholders simply deliver cash to SSgA, who then goes out and buys the underlying bonds itself.
SSgA maintains that this system is more efficient, as its huge size allows it to gain good pricing and execution in the junk bond markets. Others argue that cash creations harm the tax-efficiency of ETFs, and that the liquid nature of the competing indexes renders the point moot.
Time will tell, but based on the initial data, JNK is a nice addition to the market. According to data from BGI, PowerShares and SSgA, the index underlying JNK has significantly outperformed the competing indexes on a 1-, 3- and 5-year basis. The fund also has a lower expense ratio, at 0.40% compared to 0.50% for the competing funds. It also has more than twice the number of components of the competing funds.
• More on Broad US Bond ETFs