Invesco‘s contingent convertible bond ETF, the Invesco AT1 Capital Bond UCITS ETF, has surpassed $500 million in assets under management.
Jim Goldie, Head of EMEA ETF Capital Markets, Invesco.
The milestone was reached on 22 October, sixteen months after the fund’s debut on the London Stock Exchange in June last year.
The fund has benefitted from strong investor inflows (circa $286m in net new assets in the past six months) and robust market performance (+15.9% YTD).
According to Invesco, the ETF has found appeal with income investors who have broadened their search for yield beyond traditional fixed income asset classes.
CoCos
The fund provides access to Additional Tier 1 (AT1) contingent convertible bonds (CoCos) issued by European banks.
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. AT1 bonds were created in response to the financial crisis of 2007-2008 and, until recently, were predominantly the domain of larger institutional investors.
Jim Goldie, Head of EMEA ETF Capital Markets, Invesco, commented, “We’re seeing broader adoption of fixed income ETFs across the investor spectrum. The growth of our AT1 ETF is a great example of how investors are using the wrapper to obtain exposure to segments of the fixed income market that they may not be able to access directly.”
The fund’s underlying index is the Markit iBoxx USD Contingent Convertible Liquid Developed Market AT1 (8/5% Issuer Cap) Index which focuses on the US dollar-denominated AT1 bond market, the deepest and most liquid in which European banks issue AT1 bonds.
The index offers exposure to over 80% of European banks by market cap, including all of the largest issuers. The top five issuers in the index are each capped at 8% and the remaining issuers are capped at 5%.
The index’s effective yield is currently 5.6% compared to 3.4% and 5.9% for the US investment-grade and high-yield markets respectively. And with a duration of 3.2 years, the index exhibits less sensitivity to changes in interest rates than the broader fixed income market.
Paul Syms, Head of EMEA ETF Fixed Income Product Management, Invesco, said, “What’s particularly interesting for investors is the fact the high yields on AT1s are due to this contingency element, rather than the riskiness of the issuer, as is the case with high-yield bonds. Our ETF has an average credit rating of BB+, so investors can gain exposure to high yields through investment-grade issuers.”
Raphael Stern, Portfolio Manager of the Invesco AT1 Capital Bond UCITS ETF, added, “Since we focus solely on USD issuance and have certain liquidity rules built into our benchmark, we are able to manage relatively large trades without impacting how closely the fund is able to track the index. Our ETF offers a diversified solution for investors who do not want to take on the risk of hand-picking individual AT1 bonds.”
The fund comes with an expense ratio of 0.39%. It is available to trade on LSE in USD (AT1 LN) and GBP (AT1P LN) as well as on Borsa Italiana in EUR (AT1 IM) and SIX Swiss Exchange in USD (IAT1 SW). Euro- and pound sterling-hedged share classes are also available.
Other providers to offer CoCo bond ETFs are UniCredit and WisdomTree. China Post Global did have a product but liquidated it earlier this year.
