Australian ETF provider BetaShares has launched the BetaShares Active Australian Hybrids Fund (HBRD AU), the country’s first active ETF to invest in hybrids, on Australian Securities Exchange.

Alex Vynokur managing director of BetaShares.

Hybrids are securities that combine elements of debt and equity securities. The most common type of hybrid security is a convertible bond, which has some features of an ordinary bond while having the option to convert into a specified number of that companies’ shares at certain times during the bond’s life. Because of this convertibility, this type of bond is heavily influenced by the share price of the company in question.

Convertible bonds participate in the upside potential of a company’s stock price. Specifically, the value will be a function of the amount of shares the bond can be converted into (known as the market conversion rate) and the prevailing price per share. When stock prices fall, however, the bond trades more like a traditional fixed income security.

Note that if a stock price falls dramatically this could be a signal that the creditworthiness of the issuer has worsened, which may also be reflected by falling bond prices. It is also worth noting that a significant number of convertible bonds are also callable. This poses a risk to the investor if interest rates begin to fall as the likelihood of the bonds being called would increase, potentially requiring the investor to re-invest the proceeds at a lower interest rate.

In a rising rate environment, however, stocks tend to outperform bonds, which may make an ETF based on convertibles more appealing than those based on regular bonds.

HBRD provides a one-ticket solution for investors seeking the diversification benefits of a high-quality portfolio of hybrids. Coolabah Capital Institutional Investments, an independent Australian manager of credit securities, with deep expertise in valuing and investing in hybrids, will act as sub-advisor to the fund.

Alex Vynokur, managing director of BetaShares, commented: “HBRD is an innovative solution for investors. As an asset class, hybrids offer investors attractive tax-efficient income, and generally higher levels of capital stability and lower levels of volatility compared to Australian shares.

In addition, the firm writes that the fund’s strategy has been specifically designed to manage the risks associated with hybrids during particular market conditions. If the hybrids market is assessed to be overvalued or to present a heightened risk of capital loss, the fund may allocate more of its portfolio to lower risk securities or even move entirely into cash.

The fund will target volatility of 3% to 4% per annum – less than one-third of that historically displayed by the Australian sharemarket.

“While Australian investors have for many years been attracted to hybrids for these attributes, they are complex instruments and require vigilant oversight and risk management,” continued Vynokur. “We are bringing to the market a solution that provides investors with exposure to a portfolio of hybrids while also actively managing risk.”

The fund’s portfolio currently has 35 holdings and a net yield (average yield weighted by portfolio weight divided by current market prices) of 3.8%.

The fund will pay monthly distributions and investors in the fund will be entitled to franking credits.

HBRD has annual management fees of 0.55%.