China Post Global has launched the Market Access Markit iBoxx EUR Contingent Convertible Liquid Developed Market AT1 Index UCITS ETF on London Stock Exchange (M9AT LN), Euronext Amsterdam (M9AT NA) and SIX Swiss Exchange (M9AT SW).

Danny Dolan, managing director of China Post Global (UK).

The fund provides exposure to euro-denominated Additional Tier 1 ‘CoCo’ bonds.

Introduced in the aftermath of the 2008 financial crisis, AT1 CoCos make up a strata in the capital structure of European financial institutions that is intended to protect bank depositors on a ‘going concern’ basis.

The bonds are a form of hybrid debt that convert into equity or have their principal written down to absorb the issuer’s capital losses upon the occurrence of certain triggers, such as the issuer falling below a specified liquidity ratio.

By imposing losses on their holders under certain ‘stressful’ conditions, the bonds reduce the risk that the bank itself will be liquidated.

Investors are attracted to the bonds due to the high levels of income they offer and their low sensitivity to changes in interest rates. They also have a low correlation with other asset classes, and thus offer the potential for portfolio managers to diversify risk and sources of return whilst enhancing yield.

The fund tracks the Markit iBoxx EUR Contingent Convertible Liquid Developed Market AT1 Index. To be eligible for inclusion in the index, bonds must have at least €700 million in amount outstanding and be issued by firms with at least €1 billion in total issuer amount outstanding. While bonds must have at least one year remaining to maturity to enter in the index, constituents are held until maturity.

The index, which currently comprises 40 bonds from 19 different issuers, is weighted by market value with an issuer cap of 7.5%.

“This is an exciting new ETF for which we’re seeing considerable demand from institutional investors” said Danny Dolan, managing director of China Post Global (UK). “Investors appreciate its transparency and the lack of foreign exchange risk, as it’s a euro-denominated ETF providing exposure to a purely euro index. The ETF tracks the same iBoxx AT1 index used in the institutional swap market, and investors appreciate the additional liquidity this entails.”

“We are excited that China Post Global is launching the first ETF referencing our iBoxx EUR Contingent Convertible AT1 Index and bringing an innovative product to market,” added Max Ruscher, director for indices at IHS Markit. “This ETF creates a new opportunity for investors to gain exposure to the EUR CoCo market, while expanding the tradable ecosystem supported by iBoxx indices.”

The ETF has a total expense ratio (TER) of 0.48%.

China Post Global is the third ETF issuer to launch an AT1 CoCo bond ETF in Europe this year.

WisdomTree was the first to market with the launch of the WisdomTree AT1 CoCo Bond UCITS ETF (CCBO LN), linked to the Markit iBoxx Contingent Convertible Liquid Developed Europe AT1 Index. It provides exposure to CoCos denominated in US dollars, euros and pound sterling, and has a TER of 0.50%.

Invesco followed with the launch of the Invesco AT1 Capital Bond UCITS ETF (AT1 LN), tracking the Markit iBoxx USD Contingent Convertible Liquid Developed Market AT1 (8/5% Issuer Cap) Index. This ETF focuses on the US dollar-denominated AT1 bond market, the deepest and most liquid in which European banks issue AT1 bonds. It is also the cheapest at 0.39%.