WisdomTree adds currency-hedged share classes to CoCo bond ETF

Aug 28th, 2018 | By | Category: Fixed Income

WisdomTree has introduced a medley of currency-hedged share classes for its WisdomTree AT1 CoCo Bond UCITS ETF.

WisdomTree adds currency-hedged share classes to CoCo bond ETF

WisdomTree has launched currency-hedged share classes for its CoCo bond ETF, mitigating currency risk relative to the US dollar, pound sterling, or euro.

The new share classes offer a degree of exchange rate risk mitigation between the currency denomination of fund’s underlying holdings and the base currency of the share class – US dollars, pound sterling, or euros.

Originally launch in May 2018, the ETF tracks the performance of the Markit iBoxx Contingent Convertible Liquid Developed Europe AT1 Index which covers contingent convertible (CoCo) bonds issued by financial institutions from developed European countries.

CoCo bonds are a form of hybrid debt that are intended to convert into equity or have their principal written down to absorb the issuer’s capital losses upon the occurrence of certain triggers, such as the issuer falling below a specified liquidity ratio.

Coco bonds generally offer higher yields than investing in senior bank debt and may offer some risk mitigation in regards to rising interest rates.

The underlying index currently has 77 constituents from 28 issuers. The index duration is 3.5 years and its yield-to-worst is 6.5%. The index is currently most exposed to securities denominated in US dollars (59.0%), while the remaining exposure is made up of bonds denominated in euros (31.5%) and pound sterling (9.5%).

Rafi Aviav, WisdomTree Head of Product Development in Europe, said, “The CoCo Bond ETF offers uniquely broad and diversified exposure to CoCos and the index tracks 95% of the liquid developed AT1 CoCo bond universe across euro, pound and dollar denominations.

“We believe that the best way to take currency risk out of CoCos is through a currency hedge applied to a broad, diversified portfolio rather than taking a view on portfolios of a single denomination, which tend to be concentrated and unrepresentative of the underlying universe.”

The US dollar-hedged and pound sterling-hedged share classes have been listed on London Stock Exchange under the tickers CODO LN and COGO LN respectively. The euro-hedged share class is available on Xetra (WTEB GY) and Borsa Italiana (COBO IM).

Each of the currency-hedged share classes comes with the same total expense ratio (TER) of 0.50% as the unhedged version, which has listings on LSE, Xetra, and Borsa Italiana.

The currency hedging methodology consists of entering into a forward exchange contracts. Intra month, the notional amount of the hedge position may not exactly offset the foreign currency exposure of a hedged share class. Depending on whether the index has appreciated or depreciated between each monthly hedge position re-set, a hedged share class’s foreign currency exposure may be under-hedged or over-hedged respectively.

State Street has been appointed to facilitate the carrying out of forward exchange transactions.

Any costs related to such hedging shall be borne separately by the relevant hedged share classes. All gains/losses which may be made by any hedged share classes of a fund as a result of such hedging transactions shall accrue to the relevant share class.

The fund has assets under management of approximately $40m.

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