ProShares Debuts USD Covered Bond ETF - ETF News And Commentary
May 25 2012 - 3:05AM
Zacks
ProShares, the Maryland-based ETF issuer, appears to be at the
product development front again, having launched another new ETF
onto the market. However, unlike many of the company’s products,
this one will not use a leveraged or inverse strategy.
Instead, it looks as though ProShares will continue to make a
push into the unlevered bond ETF space as a way to further increase
the firm’s assets under management beyond its clear dominance of
the leveraged and inverse markets. Currently, the company has just
one other product in this important market segment, the
German Sovereign/Sub-Sovereign ETF (GGOV).
Unfortunately, this product has failed to generate a great deal
of interest during its first quarter on the market, as the product
currently sees volume of less than 1,000 shares a day and AUM less
than $5 million. Undoubtedly, ProShares is hoping for a more
positive reception to its latest addition to the fixed income
world, the USD Covered Bond ETF (COBO).
This product looks to track the BNP Paribas Diversified USD
Covered Bond index which seeks to give investors exposure to the
‘covered bond’ market. These securities are debt instruments issued
by a financial institution that are secured by a segregated pool of
assets, generally public-sector loans or mortgages (read 11 Great
Dividend ETFs).
According to ProShares, this differs from other debt instruments
in that bondholders in these securities have a senior, unsecured
claim against the financial institution, which is secured by the
cover pool should a credit event arise. This means that not only do
investors have the ability to recoup their investment via the
underlying asset, but they also can regain their principal via the
issuing institution as well (read Real Estate ETFs: Unexpected Safe
Haven).
Thanks to this, covered bond asset pools tend to have rock solid
holdings and are readily managed by a financial institution so that
in the event of a catastrophe, the financial institution can just
use the underlying assets to pay out any claims. This strategy also
ensures that most covered bonds have ‘AAA’ ratings by most
institutions, suggesting that they are among the safest investments
in the fixed income world.
COBO Portfolio
Currently, COBO charges 35 basis points a year in fees and
consists of 36 securities in total, most of which have a very low
duration. In fact, the modified adjusted duration is just 3.3 years
while the weighted average maturity comes in at a similar level as
well.
While this reduces interest rate risk, investors should note
that this also results in a lower yield. Current payouts are
projected to come in around the 1.5%-2.1% level, a meager rate
which is also hurt by the lower risk levels that come thanks to the
collateralization inherent in the space (see Three ETFs With
Incredible Diversification).
In terms of holdings, securities from Canadian banks dominate
the top holdings, led by TD Bank notes maturing in 2016. Beyond
that, BNP Paribas Home Loans maturing in 2015, and a pair of Bank
of Nova Scotia issues round out the top four.
COBO Outlook
This product finally opens up the covered bond market to retail
investors, bringing liquidity and tradability to what is usually a
very closed-off sector. Thanks to this, the product could see some
solid inflows from investors who are looking for more
diversification in their bond portfolios but are uncertain about
buying up Treasury securities or other top-rated ‘regular’
corporate debt (see Three Bond ETFs For A Fixed Income Bear
Market).
For these groups, COBO could make an interesting addition,
although the low yield could be a prohibitive factor in terms of
garnering investors at this time. Yet with that being said, covered
bonds are a growing market and ProShares seems to think that the
space could be a growth area for the company in the near future and
a good way to further expand into unleveraged securities.
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