State Street Debuts Crossover Bond ETF

by on June 25, 2012 | ETFs Mentioned:

The innovation continues to impress in the ETF industry, particularly in the fixed income corner of the market. Earlier this week, State Street launched two additional bond ETFs, including a fund that targets both major “buckets” of the corporate bond market and a fund that will focus on debt of emerging markets companies.

Under The Hood: XOVR

XOVR Facts
Average Coupon 6.56% 
Average Credit Quality BA1
Modified Adjusted Duration 5.70 years
Yield To Maturity 4.89%
Number of Holdings 3,027

The SPDR BofA Merrill Lunch Crossover Corporate Bond ETF (XOVR) will seek to replicate the performance of an index that includes both investment grade and junk corporate bonds. Whereas most corporate bond ETFs focus specifically on one “quality level” within the bond universe, XOVR will hold a portfolio comprised of both high and low quality debt securities. In other words, it can be thought of as a stop along the risk/return continuum between funds such as LQD that focus on investment grade corporate bonds and products such as JNK and HYG that target junk bonds.

The XOVR portfolio will be split almost evenly along the risk spectrum; about 47% of holdings are rated below Baa, with the remainder rated Baa or higher. XOVR will charge an expense ratio of 0.30%.

[See the XOVR fact sheet]

Also Launching: EMCD

EMCD Facts
Average Coupon 6.29% 
Average Credit Quality BAA3 
Modified Adjusted Duration 5.65 years 
Yield To Maturity 5.06% 
Number of Holdings 455

State Street also recently launched an ETF that will tap into corporate debt markets in developing economies, giving U.S. investors another tool to round out the emerging markets portion of their portfolios. The SPDR BofA Merrill Lynch Emerging Markets Corporate Bond ETF (EMCD) will seek to replicate an index that consists of U.S. dollar-denominated emerging markets corporate senior and secured debt publicly issued in the U.S. domestic and Eurobond markets.

While there are a number of bond ETFs that target sovereign debt issued in both dollars and local currencies, EMCD is just the second to target corporate bonds of emerging markets issuers. Earlier this year, WisdomTree rolled out an actively managed Emerging Markets Corporate Bond Fund (EMCB) that was the first to target this corner of the international bond market. The new State Street ETF is index-based and charges an expense ratio of 0.50%, which is 10 basis points cheaper than EMCB.

About 23% of the underlying index is rated below Baa, with the bulk of the benchmark rated Baa (48%) or A (24%).

[see the EMCD fact sheet]

Disclosure: Long EMCB.