Invesco has launched Europe’s first fixed income ETF targeting the US municipal bond market.
Invesco has launched Europe’s first ETF to target the US municipal bond market.
The Invesco US Municipal Bond UCITS ETF has listed on the London Stock Exchange in US dollars (MUNI LN) and pound sterling (MUNS LN) and has been seeded with $10 million in assets.
The fund comes with an expense ratio of 0.28%. Distributions are made to investors on a quarterly basis.
Invesco offers a US-listed version of the same strategy – the Invesco Taxable Municipal Bond ETF (BAB US) – which houses some $2.4 billion in assets.
Gary Buxton, Head of EMEA ETFs and Indexed Strategies at Invesco, commented: “We are pleased to be bringing the first municipal bond ETF to the European market. This launch opens the door to an asset class that until now has been difficult for investors to access.
“Municipal bonds offer higher yields, better average credit ratings, and much lower default rates than US investment-grade credit. We believe that unusual profile could make them attractive for many income investors.”
Paul Syms, Head of EMEA ETF Fixed Income Product Management at Invesco, added: “This ETF is the latest in our innovative income range, which addresses the growing demand from investors looking for sensible solutions that complement core fixed income holdings.
“We see its potential as an almost like-for-like replacement for some of an investor’s corporate credit exposure, albeit with slightly longer duration. Alternatively, it could be of interest to some more cautious investors looking to increase yield without having to take on excessive credit risk.”
The fund is linked to the ICE BofA US Taxable Municipal Securities Plus Index which consists of US dollar-denominated taxable municipal debt publicly issued by US states, territories, and their political subdivisions.
Eligible securities must have an investment-grade rating, a fixed coupon schedule, at least one year remaining to maturity, and satisfy minimum amount outstanding thresholds ($10m for securities with initial maturities between one and five years, $15m for those with maturities between five and ten years, and $25m for those with maturities in excess of ten years).
Constituents are weighted by market value, and the index is rebalanced on a monthly basis.
Unlike the more common tax-exempt variety, the interest from taxable municipal bonds is not subsidized by the federal government. According to Invesco, this means these securities offer attractive risk-adjusted yields that are more comparable to other taxable securities such as corporate debt.
Paul Syms said: “Taxable munis and investment-grade credit have demonstrated high correlation historically, but munis have not participated to the same extent in the rally that has driven the credit market since the Fed initiated its bond buying programme last year. The index our ETF tracks is currently yielding around 0.30% more than the typical US investment-grade credit benchmark while offering higher credit quality.”
As of 12 February, the index was yielding 2.42% with an effective duration of 9.85 years. The largest credit rating bucket was AA which accounted for 58% of the index weight with bonds rated A (17%), AAA (10%) making up the next-largest exposures. Approximately 10% of bonds within the index did not have a credit rating.