Invesco rolls out floating rate note ETFs

May 29th, 2018 | By | Category: Fixed Income

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Invesco has launched three ETFs for investors wanting passive exposure to floating rate notes (FRNs).

Paul Syms, head of EMEA ETF fixed income product management at Invesco

Paul Syms, head of EMEA ETF fixed income product management at Invesco.

Investors may choose between exposure to USD-denominated FRNs, EUR-denominated FRNs, or USD-denominated FRNs while hedging currency risk between the US dollar and the euro.

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

According to Invesco, FRN ETFs are seeing increased demand from investors concerned about rising interest rates. In 2017, 20% of flows into European fixed income ETFs went into FRN ETFs, with the proportion rising to 55% in the first quarter of 2018.

Paul Syms, head of EMEA ETF fixed income product management at Invesco, commented, “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.”

The ETFs track standard Bloomberg Barclays FRN indices in USD and EUR, but with a few refinements. Bonds must have a minimum issuance of $500 million (or €500 million), and have at least 2.5 years remaining to maturity when they are issued. FRNs are weighted by market value, while issuer exposure is constrained to 5% of the total index weight.

Additionally, FRNs are removed from the indices after they have been in issuance for 2.5 years. This helps ensure the indices are representative of bonds that are still actively traded.

Syms said, “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.”

The funds are physically-replicating, meaning they hold the underlying securities of their indices.

The Invesco USD Floating Rate Note UCITS ETF (UFLT LN) tracks the Bloomberg Barclays US Corporate FRN 500 MM Liquid Bond Index. It trades in US dollars on the London Stock Exchange and has a total expense ratio (TER) of 0.10%.

The largest sector exposure is financials, accounting for three-quarters (74.9%) of the total index weight, followed by consumer discretionary (7.2%), and technology (4.6%). Bonds rated “A” account for 61.3% of the total index weight, while bonds rated “BBB” (23.3%), and “AA” (15.4%) also play significant roles.

The Invesco USD Floating Rate Note EUR hedged UCITS ETF (UFLE GY) tracks the same index as UFLT but also provides currency hedging relative to the euro. It trades on Xetra in euros and has a slightly higher TER of 0.12%.

The funds will compete with existing FRN ETFs from Lyxor and BlackRock. The Lyxor $ Floating Rate Note UCITS ETF (BUOY LN) launched in May 2017 with a TER of 0.15%. BUOY has since lowered its fees to 0.10% to compete with the iShares $ Floating Rate Bond UCITS ETF (FLOT LN) which was brought to market in July 2017 with a TER of 0.10%. BUOY and FLOT have current assets under management of $360 million and $580m respectively.

The third FRN launch from Invesco 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 also trades on Xetra in euros and has a TER of 0.12%.

Financials is again the largest sector exposure with a weight of 69.1%, followed by consumer discretionary (17.2%) and consumer staples (4.6%). Bonds rated “A” and “BBB” account for the majority of the total index exposure with weights of 45.2% and 39.6% respectively. Bonds rated “AA” have a weight of 10.2%.

Lyxor also has an ETF tracking the euro-denominated FRN market. The Lyxor Barclays Floating Rate Euro 0-7Y UCITS ETF (FLOT FP) has over €1.2 billion in AUM and a TER of 0.15%.

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