The fixed income ETF space has continued its impressive growth in 2010, with PowerShares becoming the latest issuer to bring a new bond fund to market. The PowerShares International Corporate Bond Portfolio (PICB) will track the S&P International Corporate Bond Index, a benchmark that measures the performance of investment grade corporate bonds from non-U.S. issuers denominated in Australian Dollar, British Pound, Canadian Dollar, Euro, Japanese Yen, Swiss Franc, Danish Krone, New Zealand Dollar, Norwegian Krone, and Swedish Krona.
Exposure to international fixed income securities, an asset class that offers low correlation to U.S. equities and has posted solid returns in recent years, is a relatively new development in the ETF space. PICB joins 12 other products in the Corporate Bond ETFdb Category, becoming only the second to offer exposure to international corporate bonds. Last month State Street launched the SPDR Barclays Capital International Corporate Bond ETF (IBND), which is linked to an index measuring investment grade corporate bonds outside the U.S.
“The PowerShares International Corporate Bond Portfolio broadens our innovative family of fixed-income ETFs by providing unique access to investment-grade corporate bonds issued in developed markets outside the United States,” said Ben Fulton, Invesco PowerShares managing director of global ETFs. “International corporate bonds tend to perform differently than domestic bonds and historically have exhibited a low correlation with major asset classes. We believe PICB significantly improves access to this previously difficult to reach segment of the bond market providing investors an important new tool to meet their investment objectives.”
Head To Head
PICB will be similar to IBND in many ways, but there are some significant differences between the funds as well. PICB focuses on debt issued by non-U.S. corporations, while IBND includes exposure to non-dollar denominated bonds issued by U.S. companies. According to the IBND fact sheet, debt from U.S. companies accounts for about 18% of holdings, and issues from Goldman Sachs and GE Capital are among the largest individual holdings.
It’s also worth noting that a currency cap is included in the index underlying the new PowerShares fund; no single currency can account for more than 50% of holdings. The index underlying IBND doesn’t place restrictions on currency exposure, and euro-denominated securities currently make up just more than half of total assets.
From an expense perspective PICB is slightly cheaper, charging 0.50% compared to 0.55% for IBND.
Similar to IBND, PICB falls towards the high end of the credit quality spectrum; almost all component securities maintain a rating of “A” or higher. As of June 2, PICB had a modified duration of 6.3 years and a weighted average coupon of about 4.5%.
With investors around the world watching European markets intently, PICB should see a fair amount of interest right out of the gate. While most coverage of the ongoing euro zone woes has focused on the dismal equity market returns, fixed income securities have also been hammered by a wave of risk aversion.
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Disclosure: No positions at time of writing.