WisdomTree has launched the WisdomTree AT1 CoCo Bond UCITS ETF (CCBO LN) on London Stock Exchange.
Rafi Aviav, WisdomTree head of product development in Europe.
CCBO 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.
This is the first ETF globally to provide investors with access to the CoCo bond market, which is worth over $170 billion in Europe. [pullquote]“We are thrilled to launch the world’s first ETF that offers access to the CoCo bond market. This is a major development for investors globally who can now, for the first time, gain diversified exposure in a UCITS structure to the AT1 CoCo market with the ease and efficiency of trading an ETF.”
– Rafi Aviav, WisdomTree head of product development in Europe[/pullquote]
Rafi Aviav, WisdomTree head of product development in Europe, said, “We are thrilled to launch the world’s first ETF that offers access to the CoCo bond market. This is a major development for investors globally who can now, for the first time, gain diversified exposure in a UCITS structure to the AT1 CoCo market with the ease and efficiency of trading an ETF.”
“The developed Europe AT1 CoCo market offers attractive yields (currently at 5.1%) and could also potentially serve as a diversifier for bond portfolios in a rising rate environment. We see the current market environment as supportive for AT1 CoCo valuation, particularly considering AT1 CoCo yields today relative to other segments of the bond market, reinforced capital positions for European banks, the potential for rising interest rates and for Basel IV to further strengthen banks’ balance sheets.”
Christopher Gannatti, WisdomTree head of research in Europe, added, “Fixed income investors seeking higher-income products may wish to consider an allocation to AT1 CoCos. We believe this ETF presents an exciting addition to investor’s income-generating tool-kits, as it allows for access to this asset class in a diversified way. Investors can also choose the size of their investment ranging from smaller trades to institutional-sized allocations.
“In the current rising interest rate environment, European financials should benefit, with banks potentially seeing greater earnings. When thinking of AT1 CoCos, the primary consideration is on the fundamental strength of the banks that are issuing these securities—anything that positively impacts these institutions has the potential to positively impact this asset class. Over the available history, investing in AT1 CoCos has outperformed European Bank corporates by 4.3% and European Bank equities by 6.4%. As we continue to see signals of strength within this sector—such as the release of the Bank of England stress test results in December of 2017—we may continue to see strong performance for this asset class.”
The fund has a total expense ratio of 50bps. It has 89 holdings and a duration of 3.6 years (as at 29 March 2018). CCBO distributes income generated within the portfolio to investors, while an accumulating share class has also been launched under the ticker COCB LN. Both share classes trade in US dollars.