With interest rates hovering around the zero line, ETF providers are scrambling to bring additional products on the market to satisfy the income needs of the investing public, as reported by Barron’s:
Funky niche ETFs might be annoying to some. But State Street’s (STT) Global Advisors group today brought to market a fund which could actually clean out much of the clutter in a rather expansive ETF marketplace.
Enter the SPDR Barclays Capital Issuer Scored Corporate Bond ETF (CBND). Instead of picking and ranking its components by who’s the biggest (which, in this environment can be akin to who’s in the worst shape), CBND selects its issues based on fundamentals. Those include metrics such as return on assets, interest coverage and measures related to a company’s ability to fund short-term obligations.
Traditional benchmarks employ a market-cap sized weighting process. Some liquidity and other basic requirements for admission are thrown into the mix. The idea is to capture the entire market, warts and all.
By contrast, CBND promises to look at more fundamental business concerns to select its bonds, regardless of what the big indexes tracking investment-grade corporates might hold.
It’s an intriguing concept and somewhat similar to one used by the PowerShares Fundamental High Yield Corporate Bond Portfolio (PHB). It’s based on the so-called “fundamental indexing” approach developed by Rob Arnott’s Research Affiliates firm.
Another plus is that the new ETF is relatively cheap, charging 0.16% in annual expenses.
Time will tell how well such an avant-garde approach stacks up against more staid, market-cap weighted ETFs like the iShares iBoxx Investment Grade Corporate Bond (LQD).
Here again, time will tell if this product will attract enough investors and volume. Low annual expenses of only 0.16% are a step in the right direction, but more historical price trends are needed before this ETF makes it into my data base.
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