Market Overview

Crossed Over: Crossover Bond ETF Will Become A Regular Junk Bond Fund

Crossed Over: Crossover Bond ETF Will Become A Regular Junk Bond Fund

The final week of February was packed with exciting news from the world of exchange traded funds. News emerged that the first zero-fee ETFs are on their way and that was met with a slew of fee cuts by industry giant Vanguard.

But wait. There's more.

What Happened

Last Friday, State Street Corp. (NYSE: STT), the third-largest U.S. ETF issuer, said it's changing the name, index and investment objective for the fund currently known as the SPDR ICE BofAML Crossover Corporate Bond ETF (NYSE: CJNK) while significantly lowering the annual fee on that product.

CJNK, which debuted in June 2012, follows the ICE BofAML US Diversified Crossover Corporate Index. Crossover bonds are corporate debt that reside where the lower end of the investment-grade and high-yield universes intersect.

Why It's Important

On April 1, CJNK will become the SPDR ICE BofAML Broad High Yield Bond ETF and transition to the widely followed ICE BofAML US High Yield Index. CJNK's ticker will remain the same, but its annual expense ratio will be pared by 25 basis points to 0.15 percent, or $15 on a $10,000 investment.

State is implementing a strategy it has previously used with other funds, launching a lower cost alternative to an existing product that is already heavily used by institutional investors. CJNK is becoming a cost-friendly alternative to the SPDR Bloomberg Barclays High Yield Bond ETF (NYSE: JNK).

JNK, the second-largest high-yield corporate bond ETF, is heavily used by institutional investors and charges 0.40 percent per year. Last year, State Street introduced the SPDR Gold MiniShares Trust (NYSE: GLDM) as cheaper alternative to the SPDR Gold Shares (NYSE: GLD). The strategy is proving effective. GLDM charges 0.18 percent per year and has amassed $639 million in assets since coming to market last June, making it one of the most successful ETFs that debuted last year.

For its part, CJNK has some work to do to climb the ranks of junk bond ETFs as the fund has just $71.63 million in assets, but with the new fee of 0.15 percent, CJNK will be the cheapest junk bond ETF on the market by five basis points.

What's Next

Speaking of JNK, State Street said that ETF will be reverse split on April by a 1:3 ratio. The issuer expects the split to increase JNK's price to around $105, helping lower trading costs for clients using that fund.

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