Taking Stock: Proshares Launches USD Covered Bond ETF

Ulli Bond ETFs Contact

ProShares, the Maryland-based issuer that can be credited with the launch of a number of products that offers exposure in alternative assets, has unveiled the ProShares USD Covered Bond ETF (COBO). The fund follows the BNP Paribas Diversified USD Covered Bond Index, a benchmark that consists of US dollar denominated covered bonds that are AAA rated.

Covered bonds are debt instruments mostly issued by financial institutions that are secured by a separate pool of assets or “cover pool,” consisting mostly public sector loans and mortgages. Covered bonds, which are similar to traditional corporate bonds resemble asset backed securities created through securitization.

However, owners of covered bonds have unsecured senior claims against the issuing financial institution, which in turn is secured by the covered pool should there be a credit event (default by the issuing financial institution/bank) .

This gives added safety since the assets that make up the “cover pool” remain on the books of the issuing bank and are not transferred to a special purpose entity. Investors can recoup their investments easily since the financial institutions must ensure that the underlying asset pool is sufficient to support the outstanding obligations.

The BNP Paribas Diversified USD Covered Bond Index consists of 43 bonds from 20 different issuers from Canada, Australia and Europe. The index is adjusted on the last business day of January, April, July and October.

COBO currently hold 36 securities and each is issue is rated AAA by at least one ratings agency. Most of the bonds in the basket have a short duration, and the modified adjusted duration for the portfolio is estimated at 3.3 years.

The lower duration protects against interest rate fluctuations, but on the downside brings down yield as well. Yields are projected in the 1.5%-2.1% band, similar to US securities in the 3-7 years duration range. The net expense ratio for COBO is 35 basis points (0.35%), valid till Sep. 30, 2013.

COBO could be an attractive option for investors seeking to diversify but not keen in buying up regular US corporate bonds and Treasury notes. It opens up the covered bond market to retail investors, which was beyond their reach till now.

Again, this is a new product with no pricing and performance history. As such, I will keep it on the radar screen and write an update at some time in the future.

Disclosure: No holdings

Contact Ulli

Leave a Reply