ProShares Debuts USD Covered Bond ETF

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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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