With demand increasing from investors concerned about rising interest rates, Invesco has launched three ETFs for investors wanting passive exposure to floating rate notes (FRNs).
The firm writes that in 2017, 20 per cent of the flows into European fixed income ETFs went into FRN ETFs, while 42 per cent went into the sector in the first half of 2018.
Paul Syms, Head of EMEA ETF Fixed Income Product Management at Invesco, says: “If you look at how the ETF market has developed, there is broad coverage of equity benchmarks but in fixed income it can be more difficult to get the right benchmark.
“There has been a huge growth in the fixed income area as investors are increasingly looking for the ease of access that the ETF wrapper provides.”
Syms comments that the demand for higher yielding products over the last couple of years has made way for a demand for insurance from interest rate risk which is where Floating Rate Notes (FRNs) come into their own.
“Investors are looking for investment grade credit exposure but concerned about where interest rates are going in the US and within Europe.”
The new ETFs aim to deliver the returns of their respective benchmark indices, less fees, by investing physically in the underlying constituents. The indices are based on the standard Bloomberg Barclays FRN indices in USD and EUR, but with a few refinements. The bonds in the index must have a minimum issuance of USD500 million (or EUR500 million) to ensure liquidity; are removed after they have been in issuance for 2.5 years to ensure they are still actively traded; have at least 2.5 years maturity when they are issued.
“Demand is across the board,” Syms says. “These can also be useful cash management tools if investors are concerned about interest rate risk or the levels of the equity markets or have spare cash.”
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