Invesco launches low cost ETFs on floating rate notes

Invesco has announced that it is launching three ETFs for investors wanting passive exposure to floating rate notes (FRNs), an asset class seeing increased demand from investors concerned about rising interest rates. In 2017, 20% of the flows into European fixed income ETFs went into FRN ETFs, and 55% in the first quarter of 2018 (Source: Morningstar).

Paul Syms, Head of EMEA ETF Fixed Income Product Management at Invesco, explained:

We expect these ETFs to appeal to investors who either think bond yields are going to rise or who just want to take a defensive stance on interest rates. Instead of paying a fixed coupon, an FRN pays coupons linked to a stated benchmark rate. For instance, you could have an FRN paying 0.70% above LIBOR. If LIBOR goes up, the coupon goes up.

The new ETFs aim to deliver the returns of their respective benchmark indices, less fees, by investing physically in the underlying constituents. The indices are based on the standard Bloomberg Barclays FRN indices in USD and EUR, but with a few refinements. The bonds in the index:

• Must have a minimum issuance of $500 million (or €500 million) to ensure liquidity;
• Are removed after they have been in issuance for 2.5 years to ensure they are still actively traded;
• Have at least 2.5 years maturity when they are issued.

Syms concluded:

We believe that making even simple improvements to a standard FRN index has the potential to deliver superior results for investors while also making them more efficient to replicate. With these ETFs, we continue to build out our range of low cost passive fixed income ETFs following the launch of our broad investment grade and hard currency emerging market ETFs towards the end of last year.