Invesco launches first Euro Hybrids UCITS ETF as the firm expands range of alternative income offerings
Invesco has launched the Invesco Euro Corporate Hybrid Bond UCITS ETF which focusses on the largest part of this growing market, EUR-denominated bonds which account for around two-thirds of the EUR140 billion of issuance.
Paul Syms, Head of EMEA Fixed Income ETF Product Management at Invesco, says: “Hybrid securities are a special class of bonds. They pay out coupons like other bonds but are issued in perpetuity or with very long maturities, giving them certain equity-like qualities. However, it’s their subordination within the issuer’s capital structure that could make them particularly interesting for investors. Sitting just above common equity, hybrids typically offer a significantly higher pick-up in yield over the senior debt from the same issuer. Moreover, around 75% of hybrid securities are issued by companies with an investment grade credit rating. This means a portfolio of hybrid securities should have better credit quality than a typical high yield portfolio.”
The Invesco Euro Corporate Hybrid Bond UCITS ETF has been designed to provide passive exposure to a diversified benchmark of EUR-denominated, fixed rate hybrid securities issued by non-financial corporates or government-related agencies. Constraints are in place to improve tradability and credit quality of the index, with constituents required to have a minimum €500 million outstanding, maturities of at least 1.5 years from issue and a minimum credit rating of Ba1/BB+. In addition, individual securities will be capped at 8% of the overall index value.
Gary Buxton, Head of EMEA ETF at Invesco, says: “This new Euro Hybrid Bond ETF is the latest addition to our alternative income strategies, a group that includes AT1 Capital Bonds and Preferred Shares. They exhibit low correlation with other asset classes, so could offer important diversification benefits. 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.”
Syms says: “Market flows suggest there is certainly appetite for this type of product, with our Invesco AT1 Capital Bond UCITS ETF growing to more than USD750 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.”