UBS Asset Management has expanded its range of fixed income exchange-traded funds with the launch of the UBS Barclays US Liquid Corporates interest rate hedged UCITS ETF (LON: UCDH). The fund provides access to a diversified basket of investment grade US corporate bonds while simultaneously hedging against interest rate risk, catering to investors who are concerned about the impact to their portfolios from future Federal Reserve rate increases.
The ETF tracks a broad basket of US investment grade corporate bonds while mitigating interest rate risk.
As of 13 October 2016, pricing in the federal funds futures market implied a 20% probability for a rate hike in November but a 65% probability for an increase in December. Bond prices typically move inversely to interest rates.
Andrew Walsh, Head of UBS ETF Sales UK & Ireland, commented: “Those wishing to benefit from the favourable economic climate by investing in corporate bonds should consider minimising the interest rate risk in their portfolio. The mitigation of interest rate risk means that the bond portfolio becomes largely unaffected to interest rate hikes. This new UBS ETF with its interest rate hedge offers pure credit exposure in a cost-effective way.”
The ETF tracks the Barclays US Liquid Corporates Index, a market cap-weighted reference for liquid corporate bonds issued by investment grade companies. There are currently 512 constituents in the index. The ETF hedges against underlying interest rate risk by subtracting the return on a basket of US treasury bond futures contracts, on a monthly basis, from the total return of the index.
As of 1 September 2016 the index has a yield to maturity of 2.8% and a modified duration of 8.5 years. It is exposed to the industrials (70.6%) and financial services (28.3%) sectors. The credit quality ratings with the most exposure are BBB+ (24.8%), A- (17.5%), BBB (12.3%) and A (11.3%).
The fund trades in pounds Sterling and has a total expense ratio (TER) of 0.23%.
It will compete with the iShares $ Corporate Bond Interest Rate Hedged UCITS ETF (LON: LQDH) which tracks the iBoxx USD Liquid Investment Grade IR Hedged Index. The fund has assets under management of $85m and a TER of 0.25%.