Source and Pimco introduce GBP-hedged share class for short-term high-yield bond ETF

Nov 26th, 2015 | By | Category: Fixed Income

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Source, a European provider of exchange-traded funds, and Pimco, a leading global bond fund manager, have introduced a currency-hedged share class for the Pimco Short-Term High Yield Corporate Bond Index Source UCITS ETF (STHS).

Source and PIMCO co-launch GBP-hedged high yield bond ETF

The new share class offers the same exposure to short-term high yield US bonds but eliminates the fund’s exposure to fluctuations between the US dollar and British pound.

According to Source, the fund uses a risk factor-based approach to optimise the replication of the BofA Merrill Lynch 0-5 Year US High Yield Constrained Indexa broad range of short-term US high-yield corporate bonds, while mitigating fluctuations between the US dollar and British pound.

Mike Trovato, Head of Product Management at Pimco Europe, said: “Investors who want to enhance the yield in their portfolio may wish to consider the short-term high yield segment, as it offers a similar level of yield as the broader high yield market. In addition, with the probability of tightening by the US Federal Reserve, it may also be worth focusing on bonds with shorter maturities, as it reduces the portfolio’s sensitivity to rising interest rates. This ETF combines both of these elements.”

Recent research from WisdomTree showed that, historically, currency exposure has increased volatility but not expected return in international portfolios. Accepting currency risk adds a level of complexity to investors, especially during times of monetary intervention. The new launch caters to a growing demand from sterling-referenced investors looking for exposure to the US corporate debt market but wishing to avoid the potential drag on performance of currency exposure.

James Polisson, Chief Marketing Officer of Source, said: “This new share class responds to investor demand we have seen on two fronts.  First, it meets the needs of those investors in the UK interested in investing in the underlying US high-yield bond market, but who prefer to not have any currency exposure outside of Sterling. Secondly, it meets the needs of income-seeking investors wanting not only higher yields but also more frequent distributions.”

As of 24 November 2015, the fund was primarily invested in US corporate bonds with maturities of 1-3 years (44%) and 3-5 years (48%). There was a 93% exposure to the high yield sector, of which the most concentrated credit ratings were B (40.7%) and BB (36.3%).

The fund trades on the London Stock Exchange, along with a euro-hedged version and the main unhedged fund. A CHF-hedged version trades on the SIX Swiss Exchange. The new offering carries a total expense ratio of 0.60%.

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