Invesco launches USD-denominated AT1 CoCo bond ETF

Jun 25th, 2018 | By | Category: Alternatives / Multi-Asset

Invesco has launched the Invesco AT1 Capital Bond UCITS ETF (AT1 LN) on London Stock Exchange, providing access to Additional Tier 1 contingent convertible (“CoCo”) bonds issued by European banks.

Nicolas Samaran, head of EMEA ETF innovative product development at Invesco

Nicolas Samaran, head of EMEA ETF innovative product development at Invesco.

The fund tracks the Markit iBoxx USD Contingent Convertible Liquid Developed Market AT1 (8/5% Issuer Cap) Index which focuses on the US dollar-denominated AT1 bond market, the deepest and most liquid in which European banks issue AT1 bonds.

AT1 CoCos include a mechanical trigger that can write-down the value of the bond or convert it to common equity based on the issuing firm’s level of capital.

CoCo bonds generally offer higher yields than investing in senior bank debt – the ETF’s effective yield is currently 6.3% – and may offer some risk mitigation in regards to rising interest rates.

The index offers exposure to over 80% of European banks by market cap, including all of the largest issuers. The top five issuers in the index are each capped at 8% and the remaining issuers are capped at 5%.

Nicolas Samaran, head of EMEA ETF innovative product development at Invesco, commented, “European banking AT1 assets have become more attractive for investors who are comfortable moving up the risk curve in the search for higher yields. The index has historically delivered low correlation to other asset classes, allowing investors to diversify their income strategy. In addition, credit exposure and yield are driven by subordination, rather than risky issuers, and a dollar-denominated instrument provides greater diversification and more choice at a lower cost for investors.”

“European banking AT1 assets have become more attractive for investors who are comfortable moving up the risk curve in the search for higher yields.”
– Nicolas Samaran, head of EMEA ETF innovative product development at Invesco

As of 25 June 2018, the fund covers 52 securities. Over three-quarters (78.0%) of its exposure is dedicated to high yield securities with an average rating of BB.

The largest country exposure is the UK (29.8%), followed by France (17.3%), Switzerland (15.7%), and Sweden (10.7%).

In terms of individual names, the top three European banks tracked by the fund are HSBC, UBS, and Société Générale.

The ETF trades in US dollars and uses physical replication to track its underlying index. Income generated from holdings is accumulated and reinvested within the portfolio.

With an ongoing charge of 0.39% pa, the fund is a bit cheaper than the recently launched WisdomTree AT1 CoCo Bond UCITS ETF (CCBO LN) which costs 0.50%.

The WisdomTree fund, unveiled just last month, was the first ETF globally to provide investors with access to the CoCo bond market. It tracks the Markit iBoxx Contingent Convertible Liquid Developed Europe AT1 Index and has a broader scope than Invesco’s product in that it tracks CoCo bonds denominated in US dollars, euros and pound sterling.

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