Walking a Very Thin Line

They say it’s a fine line between brilliant and stupid. State Street Global Investors stepped out onto that tightwire with the launch of two new bond ETFs on Tuesday.

The SPDR Barclays Capital Mortgage Backed Bond ETF (MBG) and the SPDR Barclays Capital Short Term International Treasury Bond ETF (BWZ) both launched on the NYSE Arca on Tuesday. The SPDR Barclays Capital Mortgage Backed Bond tracks the mortgage pass-through sector of the U.S. investment grade bond market. SPDR Barclays Capital Short Term International Treasury Bond ETF seeks to provide the return of an index that measures the short-term (1-3 year) fixed rate, investment grade debt issued by foreign governments of investment grade countries.

The most interesting facet of these ETFs is that they carry the name of its prime competitor, Barclays. Late last year, Barclays bought the Lehman Brothers Bond Indexes division after that investment bank declared bankruptcy in September. This blog wondered if SSGA would actually put the name of its competitor into its ETFs when it tracked a former Lehman index. Well, the answer is yes.

Even funnier, is the fact that they are going head-to-head with similar bond funds out of Barclays Global Investors iShares division. Just last week, BGI launched the iShares S&P/Citigroup 1-3 Year International Treasury Bond Fund (ISHG) on the Nasdaq. Heather Bell of Index Universe breaks down the minor differences between the two. The iShares Barclays MBS Bond Fund (MBB) launched in 2007. The big difference here is the SPDR fund charges only 0.2% vs. the MBB’s 0.36%.

The question now is, is this a stupid or brilliant move? On the one hand, why would anyone give free publicity to a competitor if they didn’t have to? There are plenty of ETFs that don’t have the name of the index in the name of the corresponding ETF. However, I’m leaning toward brilliant.

As the creator of the first ETF, the Standard & Poor’s Depositary Receipts, which has been renamed the SPDR (Spider or Spyder, which is a play on its ticker symbol, SPY), SSGA has a well-respected reputation in the ETF space. Recently SSGA renamed its entire ETF family the SPDRs.

However, BGI became the market leader when it launched its iShares brand in 2000, and hasn’t let go since. SSGA is currently the second largest ETF firm in terms of assets. By launching ETFs with the SPDR Barclays name, there is bound to be confusion among investors. I’m sure there will be a sizeable number of people who buy the new SPDR bond funds assuming they were created by Barclays Global Investors. While SSGA has done a good job branding the SPDRs with the recent campaign for the Select Sector SPDRs, I’m sure there are still many people who don’t realize SPDRs and Barclays are two different companies and will by the SPDR funds with the assumption they are getting a Barclays product.

This becomes more than just inside baseball. In November, this blog reported that in the third quarter, BGI’s market share had fallen to 47.3% of the market from 50.9% in the second quarter, while SSGA’s market share grew to 26.5% from 23%. In addition, SSGA’s third-quarter cash inflows were the largest in the industry, at $41.8 billion, with $28.6 billion going solely into the SPDR (SPY) vs. iShares’ cash inflows of $23.9 billion.

Obviously, State Street is nowhere near grabbing the market leader position, still, this should get very interesting.


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