Invesco has expanded its suite of alternative income solutions with the launch of a hybrid bond ETF.

Gary Buxton, Head of EMEA ETFs at Invesco.

The Invesco Euro Corporate Hybrid Bond UCITS ETF provides diversified exposure to euro-denominated hybrid securities.

Euro-denominated securities account for roughly two-thirds of the €140 billion global hybrid bond market.

Hybrid securities are a special class of bonds that combine characteristics of equity and debt. They pay out coupons like other bonds but are issued in perpetuity or with very long maturities, giving them certain equity-like qualities.

Sitting just above common equity in an issuer’s capital structure, hybrids typically offer a significantly higher pick-up in yield over the senior debt from the same issuer. This may provide a significant income opportunity for investors in a time of record-low interest rates and meager yields from conventional government and corporate bond segments.

While hybrids’ subordination to conventional debt securities provides investors with a higher yield, these securities do come with increased risks such as reduced certainty as to the timing and amount of income generated, the potential for the security to be terminated at a time not beneficial to the holder, and the holder being subordinate to other creditors in the event of insolvency.

According to Invesco, however, around 75% of hybrid securities are issued by companies with an investment-grade credit rating, potentially offering a degree of resiliency during tough economic periods.

The fund has listed on London Stock Exchange in pound sterling (EHYB LN) and on Xetra in euros (EHYB GY) and is due to roll out on Borsa Italiana (EHYB IM) and SIX Swiss Exchange (EHYB SW) in the near future.

Income is distributed to investors on a quarterly basis, although investors may also access the fund through an accumulating share class listed on Xetra (EHBA GY).

It comes with an ongoing charge of 0.39%.

Index methodology

The fund is linked to the Bloomberg Barclays Euro Universal Corporate ex Financials Hybrid Capital Securities 8% Capped Bond Index which includes euro-denominated hybrid securities issued by non-financial corporates or government-related agencies.

Fixed-rate, original zero-coupon, callable fixed-to-floating, and step-up coupon bonds are all eligible for selection. Any fixed-to-floating security will be removed from the index one year prior to its conversion to floating-rate.

Only subordinated hybrid issues are included. These are securities classified as capital credit, subordinated, subordinated debentures, junior debentures, or junior subordinated debentures.

Securities are required to have a minimum of €500 million outstanding, a maturity of at least 18 months from issue, and a minimum credit rating of Ba1/BB+.

Constituents are weighted by market value with individual securities capped at 8%.

The index is currently yielding 2.75% with an effective duration of 4.1 years. Roughly two-thirds of the portfolio is allocated to investment-grade securities (A-rated names contribute 8.9% while BBB-rated constituents comprise 59.1%) with the remainder of the portfolio (31.4%) in bonds rated BB.

Expanded income solutions

Invesco has steadily built out a comprehensive alternative income ETF suite in recent years. The firm launched Europe’s first preferred share ETF , the $150m Invesco Preferred Shares UCITS ETF (PRFD LN), in October 2017 as well as the first variable-rate preferred share ETF, the $10m Invesco Variable Rate Preferred Shares UCITS ETF (VRPS LN), a year later. These funds each have ongoing charges of 0.50%.

The stand-out performer of the suite, however, has been the Invesco AT1 Capital Bond UCITS ETF (AT1 LN), launched in June 2018, which has grown to over $700m in AUM. The fund, which has an ongoing charge of 0.39%, provides access to Additional Tier 1 contingent convertible (CoCo) bonds issued by European banks.

Gary Buxton, Head of EMEA ETF at Invesco, said, “This new Euro Hybrid Bond ETF is the latest addition to our alternative income strategies…We were one of the first ETF issuers in Europe to open the door to investors wanting to access these additional sources of balance sheet capital.”

Paul Syms, Head of EMEA Fixed Income ETF Product Management at Invesco, added, “Market flows suggest there is certainly appetite for this type of product, with our Invesco AT1 Capital Bond UCITS ETF growing to more than $750 million in AUM since launch. Euro Hybrids are similar in many ways to AT1s but are issued by non-financial companies, providing further opportunity for investors to diversify their portfolio exposures.”