Invesco is launching three ETFs designed for investors who want passive exposure to floating rate notes (FRNs), an asset class seeing increased demand from investors concerned about rising interest rates.
In 2017, 20 per cent of the flows into European fixed income ETFs went into FRN ETFs, and 55 per cent in the first quarter of 2018, Invesco says.
Paul Syms, Head of EMEA ETF Fixed Income Product Management at Invesco, explains: “We expect these ETFs to appeal to investors who either think bond yields are going to rise or who just want to take a defensive stance on interest rates. Instead of paying a fixed coupon, an FRN pays coupons linked to a stated benchmark rate. For instance, you could have an FRN paying 0.70 per cent above LIBOR. If LIBOR goes up, the coupon goes up.”
The new ETFs aim to deliver the returns of their respective benchmark indices, less fees, by investing physically in the underlying constituents. The indices are based on the standard Bloomberg Barclays FRN indices in USD and EUR, but with a few refinements. The bonds in the index must have a minimum issuance of USD500 million (or EUR500 million) to ensure liquidity; Are removed after they have been in issuance for 2.5 years to ensure they are still actively traded and have at least two and a half years maturity when they are issued.
Syms concludes: “We believe that making even simple improvements to a standard FRN index has the potential to deliver superior results for investors while also making them more efficient to replicate. With these ETFs, we continue to build out our range of low cost passive fixed income ETFs following the launch of our broad investment grade and hard currency emerging market ETFs towards the end of last year.”