BNP Paribas launches defensive European high yield bond ETF

Oct 19th, 2017 | By | Category: Fixed Income

BNP Paribas has launched a new ETF offering exposure to the European high yield credit market while hedging against market downturns through the use of a protective put strategy.

BNP Paribas launches defensive European high yield bond ETF

HYPE protects against market downturns by systematically buying put options on its underlying index.

A protective put is a risk-management strategy that acts like an insurance policy — it consists of a long investment in a security and the purchase of puts (insurance contracts) on the value of the security. The strategy costs money (the premium paid to own the option), which reduces the investor’s potential gains from owning the security; however, the strategy also reduces the risk of losing money if the security declines in value.

The BNP Paribas Easy High Yield Europe Defensive UCITS ETF (Euronext Paris: HYPE) synthetically tracks an index created in-house by BNP Paribas’s indexing division. It provides a long exposure to a volatility-controlled version of the BNP Paribas High Yield Europe 5Y Credit Index, which tracks iTraxx Crossover, a Markit index giving exposure to the below-investment-grade European credit market. The risk-control mechanism inherent in the methodology seeks to cap index volatility at 9%. The strategy simultaneously goes long a portfolio of put options linked to the performance of this volatility-controlled index.

HYPE’s underlying index, the BNP Paribas High Yield Europe Defensive Index, has returned 6.0% year-to-date. Since its inception in December 2004, using back-tested data, the index has risen 98.3% (5.5% per annum) with an annualized volatility of 5.3%. The maximum draw-down has been 8.9%, highlighting its ability to shield the portfolio from losses over this period.

Isabelle Bourcier, global head of ETF & index solutions within BNP Paribas Asset Management, commenetd: “BNP Paribas Asset Management is the first to provide a systematic solution offering high yield exposure while protecting downside risk and minimising cost of capital. The BNP Paribas Easy High Yield Europe Defensive UCITS ETF offers investors an attractive yield, while the systematic hedge embedded in our solution decreases the cost of capital by more than 70% under Solvency II, making this ETF ideally suited to the needs of insurers.”

HYPE trades in euros and has an ongoing charge of 0.40%.

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