
Fixed Income ETFs
ETFs can offer convenient access to broad and diversified baskets of bonds at a low cost. Discover our range of fixed income ETFs.
You can find higher yields without looking at traditional high yield markets
Investors wanting higher yields than they could get from government or investment grade corporate bonds would normally have to invest in companies with lower credit ratings. Less financially secure companies must pay higher coupons to compensate bond investors for the additional risk they’d be taking, i.e., the risk of the issuer being unable to pay the coupons or the principal. While this trade-off is agreeable for some investors, others are unable to accept this higher default risk.
Fortunately, more innovative solutions are now available. While they are not without risk, they can offer investors the potential for higher yields without having to necessarily accept lower credit quality or greater interest-rate risk. These securities are often from investment-grade issuers, with the higher coupons due to their subordination and other features, not the company’s credit rating.
A new type of security was created as a result of the global financial crisis, to act as a buffer in the case of another financial stress event. Contingent convertible bonds, also known as “CoCos” or Additional Tier 1 (AT1) capital bonds, are issued by European banks. Because of a mechanism that converts the bonds to common equity if the bank’s capital falls below a regulatory threshold, their yields can be materially higher than the senior debt from the same issuer and, indeed, can often compete with yields from sub-investment-grade issuers.
The Invesco AT1 Capital Bond UCITS ETF seeks to track the iBoxx USD Contingent Convertible Liquid Developed Market AT1 (8% Issuer Cap), an index of USD-denominated AT1 securities issued by European banks and financial institutions. The index has been customised to screen out any issuers involved in certain business practices while maintaining investibility and liquidity standards.
Corporate hybrid bonds are similar to AT1s in many ways, including often being issued by companies with strong balance sheets and investment-grade credit ratings. The most obvious difference is that AT1s are only issued by financial institutions whereas corporate hybrids are issued by utilities, telecoms and companies in other non-financial sectors. Corporate hybrids can be appealing for the issuing company because credit rating agencies treat them as part debt/part equity, meaning they can support the issuer’s credit metrics. Meanwhile, corporate hybrids are subordinate to the senior debt from the same issuer, which explains the higher yields offered.
The Invesco Euro Corporate Hybrid Bond UCITS ETF seeks to tracks the Bloomberg Euro Universal Corporate ex Financials Hybrid Capital Securities 8% Capped Bond Index, an index of EUR-denominated, fixed-rate hybrid securities, with constraints in place to improve the tradability and credit quality of the index.
Both Invesco ETFs aim to track the performance of an index through passive, physical replication. This means the ETFs will hold as far as is possible and practical all the securities in the index in their respective weightings and rebalance the holdings whenever the index is rebalanced.
Invesco’s team of portfolio managers are responsible for the efficient buying and selling of the ETF’s bonds, and the rebalancing of the portfolio, while our dedicated capital markets team works closely with leading brokers and market-makers who facilitate the efficient trading of our ETFs.
The full list of ETF holdings and index constituents are published daily on the Invesco ETF website.
ETFs can offer convenient access to broad and diversified baskets of bonds at a low cost. Discover our range of fixed income ETFs.
April's fixed income markets saw mixed performance and volatility. Read our latest thoughts on how fixed income markets fared during the month and what we think you should be looking out for in the near term.
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