Solactive launches Australian bank floating rate bond index

Jun 14th, 2017 | By | Category: Fixed Income

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Frankfurt-based Solactive has launched its first index targeting the Asia-Pacific region with the introduction of the Solactive Australian Bank Senior Floating Rate Bond Index. The index targets the largest and most liquid floating rate Australian dollar-denominated debt securities issued by selected Australian banks, and has been licensed to Aussie ETF provider BetaShares to underlie the BetaShares Australian Bank Senior Floating Rate Bond ETF (ASX: QPON). (See: BetaShares launches Australian floating rate ETF)

Solactive launches Australian bank floating rate bond index

Floating rate bonds provide expose to a variable coupon which offers a layer of protection from rising interest rates.

At least 80% of the index’s underlying assets are composed of floating rate bonds issued by the four largest Australian banks (ANZ Bank, Commonwealth Bank of Australia, National Australia Bank and Westpac), with the remaining 20% invested in bonds issued by the large ‘regional’ banks, including Macquarie Bank and AMP Bank. QPON is the first ETF in Australia to offer exposure to a diversified portfolio of bank floating rate bonds in one trade on the ASX.

The index is calculated as a total return index. The bonds included in the index are senior bonds, denominated in AUD and issued by Australian banks. To be eligible for inclusion, bonds must have a minimum AUD 500 million outstanding and a time to maturity between one to five years. The index is currently composed of 13 floating rate bonds.

Floating rate bonds expose investors to variable interest payments tied to a reference benchmark. The variable coupon feature provides a layer of protection from rising interest rates, as bond yields fluctuate in relation to the benchmark. In the case of Australia, the Reserve Bank of Australia has adopted a low interest rate policy, with rates set at historic lows. In this context, the index may appeal to fixed-income investors who are foreseeing a potential rate increase in the future. In addition, due to their floating interest rate structure and high credit quality, these bonds tend to offer an income premium over traditional cash and short-term deposit products for only marginally greater interest rate risk and credit exposure.

Steffen Scheuble, CEO, Solactive, commented: “We are happy working together with BetaShares to provide cost-efficient access to Australian banks’ floating rate bonds. The launch of the Solactive Australian Bank Senior Floating Rate Bond Index demonstrates that we are capable of responding to the needs of an increasingly international customer base and expand our footprint globally.”

Alex Vynokur, managing director, BetaShares, added: “We believe QPON has an important role to play in investment portfolios given the current interest rate climate. Demand for the strategy has been strong in Australia, and, with the strategy paying income of approximately 2.9% before fees at the time of writing along with very low historical capital volatility from Australian bank floating rate bonds, we believe that QPON will also receive interest from investors in other geographies such as Europe and Asia. We are proud to be continuing to innovate the ETF industry by expanding the range of investing solutions available.”

QPON has a management expense ratio of 0.22%.

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