Exchange traded fund provider Invesco PowerShares Capital Management has filed registration statements for two actively managed ETFs focused on the non-agency, prime and Alt-A residenti
Exchange traded fund provider Invesco PowerShares Capital Management has filed registration statements for two actively managed ETFs focused on the non-agency, prime and Alt-A residential mortgage-backed securities markets.
They are expected to be launched as the PowerShares Prime Non-Agency RMBS Opportunity Fund and PowerShares Alt-A Non-Agency RMBS Opportunity Fund.
“We believe that various economic factors have converged to push the prices of many prime and Alt-A residential mortgage-backed securities well below their fundamental values,” says Bruce Bond, president and chief executive of Invesco PowerShares. “We are hopeful that these ETFs will provide access and transparency into these markets along with some of the much needed additional liquidity originally intended by the Troubled Assets Relief Program.”
Aggressive mortgage lending practices, declining home prices and a faltering economy have caused mortgage loan performance to deteriorate significantly over the last two years. Many holders of mortgage related securities have come under pressure to raise capital and reduce exposure to RMBS markets, resulting in systematic deleveraging.
Invesco PowerShares believes that these events have pushed the prices of many residential mortgage-backed securities well below fundamental values implied by conservative cash flow projections.
Even the prices of senior and super senior residential mortgage-backed securities, which generally have first right to principal payments and are typically the last to sustain losses, have been severely impacted despite their significant credit enhancement and advantageous position within the capital structure.
Invesco PowerShares believes this may be an opportunity for investors to recognise above average risk-adjusted returns by investing in discounted senior and super senior prime and Alt-A residential mortgage-backed securities. In addition, the firm believes these securities should generate current principal and interest income as well as potential capital gains.
In addition to cash considerations, the two anticipated ETFs anticipate allowing authorised participants to contribute specific blocks of residential mortgage-backed securities to the funds in exchange for shares of the ETFs. This in-kind transaction may be advantageous for organisations seeking increased liquidity and diversification within their current exposure to RMBS markets.
In addition, the funds may offer increased flexibility with respect to balance sheet and capital requirements.
The PowerShares Prime Non-Agency RMBS Opportunity Fund will seek to provide total return by investing, under normal market conditions, at least 80 per cent of its assets in non-agency mortgage-backed securities collateralized by pools of prime residential mortgage loans.
The PowerShares Alt-A Non-Agency RMBS Opportunity Fund will seek to provide total return by investing, under normal market conditions, at least 80 per cent of its assets in non-agency mortgage-backed securities collateralized by pools of Alt-A residential mortgage loans.
