BlackRock launches new floating rate bond ETF for the euro market

Jun 28th, 2018 | By | Category: Fixed Income

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BlackRock has launched the iShares € Floating Rate Bond UCITS ETF (EFRN LN) on London Stock Exchange, providing exposure to short maturity, euro-denominated floating rate bonds from corporate issuers.

BlackRock launches new floating rate bond ETF for the euro market

EFRN provides exposure to short maturity, euro-denominated floating rate bonds from corporate issuers.

Floating rate bonds offer coupons that adjust to reflect changes in interest rates, compared with traditional bonds which pay fixed coupons.

While portfolios containing traditional (non-floating) bonds are susceptible to losing value in response to rising interest rates, floating rate bonds typically do not respond the same way. This can be seen by EFRN’s current effective duration of 0.22 years, indicating that a 1% parallel rise in interest rates would only result in a 0.22% decline in the ETF’s value, not accounting for convexity effects.

The fund tracks the Bloomberg Barclays EUR FRN Corporate 2% Issuer Cap Bond Index. Bonds in the index must be rated investment grade, have at least €300 million in value outstanding, and have a remaining maturity greater than one month. Issuer exposure is capped at 2%, and the index is rebalanced monthly.

The US is the index’s largest country exposure with a weight of 23.4%, followed by France (16.7%), Germany (12.0%), the UK (11.3%), and Sweden (5.6%). Bonds from banking firms make up the majority (59.6%) of the total index weight, with sizable allocations to bonds from consumer cyclical (14.7%) and consumer non-cyclical (12.2%) companies.

The largest credit quality bucket is bonds rated A with a weight of 45.5%, with over a third (36.2%) of the index weight in bonds rated BBB, and the remaining weight (18.1%) allocated to bonds rated AA.

EFRN has a total expense ratio (TER) of 0.10%, pricing it in line with the iShares $ Floating Rate Bond UCITS ETF (FLOT LN). FLOT launched in July 2017 and became Europe’s cheapest ETF to target the US dollar-denominated floating rate bond market. It tracks the Bloomberg Barclays US Floating Rate Note < 5 Years Index and has accumulated over $609m in AUM since launch.

There are a number of other EUR floating rate ETFs currently available in Europe including products from Lyxor, Amundi and Invesco.

The Lyxor Barclays Floating Rate Euro 0-7Y UCITS ETF (FLOT FP) tracks the Bloomberg Barclays Euro Corporate 0-7Y Enhanced Duration Unhedged Index, composed of variable-rate corporate bonds issued in euros with residual maturity of less than seven years. It has a TER of 0.15% and AUM of over €1.3 billion.

The Amundi ETF Floating Rate Euro Corporate 1-3 UCITS ETF (AFRN FP) tracks the Markit iBoxx EUR Floating Rate Notes Investment Grade 1-3y Index, providing exposure to a narrower maturity range of floating rate corporate bonds. It has a TER of 0.18% and AUM of over €800m.

The third ETF is the Invesco EUR Floating Rate Note UCITS ETF (EFNT GY) which tracks the Bloomberg Barclays Euro Corporate FRN 500 MM Liquid Bond Index. It was launched in May of this year and has a TER of 0.12%.

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