Lyxor offers interest-rate protection with new floating-rate note ETF

May 17th, 2017 | By | Category: Fixed Income

Lyxor, the second largest provider of fixed income ETFs in Europe, has launched the Lyxor $ Floating Rate Note UCITS ETF (LON: BUOY), offering bond investors exposure to the US dollar-denominated corporate market with protection from rising interest rates.

Floating Rate Note ETFs

Floating rate bonds adjust their coupon payments in line with changes to a reference rate such as LIBOR or a benchmark Treasury yield.

BUOY invests in floating-rate bonds that adjust their coupon in line with changes to the three month London Interbank Offered Rate (LIBOR).

As rates rise, the bonds’ yields are protected. In Europe, floating-rate bond ETFs have gathered nearly €2bn in net new assets during the first four months of 2017 as investors brace themselves for further rate hikes in the US.

The index underlying BUOY is the Bloomberg Barclays US Corporate FRN 2-7 Yr Index, which tracks only investment-grade bonds with at least $500 million outstanding. The index is representative of the performance of US dollar-denominated, investment-grade, floating-rate notes issued by US and non-US corporates from the industrial, utility and financial sectors, with maturities from two to seven years. Bonds issued more than two years ago, or from emerging market companies are excluded from the index universe.

There are currently 128 individual components within the index. Due to the floating-rate nature of the securities, the index’s modified duration is close to zero (0.17 years), highlighting the ability to protect portfolio value from changes in interest rates. The index’s yield is 2.5%.

The US represents the largest country exposure in the index at 66.4%, followed by Japan (7.1%), Australia (6.4%) and the UK (6.1%). Bonds rated ‘A’ make up the largest quality segment at just under half (48.6%) of the index’s total exposure, followed by bonds rated ‘BBB’ (37.8%) and bonds rated ‘AA’ (13.8%). (All data as of 15 May 2017)

At 0.15%, the fund’s total expense ratio (TER) is the lowest of any US dollar-denominated floating rate note ETF in Europe, offering investors competitively priced access to this market strategy. While BUOY trades in US dollars, a GBP-denominated share class has also been rolled out on London Stock Exchange under the ticker SWIM. Together, the funds have $100m in assets under management (AUM).

Francois Millet, head of product line management, ETFs & indexing, at Lyxor said: “For us it was important to create a simple, low cost way for investors to access the US dollar-denominated floating rate note market. As a Luxembourg SICAV, this ETF will be attractive to investors right across Europe.”

Lyxor has also announced it will be rolling out a euro-hedged version of BUOY shortly to cater to investors who are concerned about the impact of currency fluctuations between the US dollar and the euro impacting performance.

Investors may also access interest-rate-hedged bond strategies from ETF providers iShares and UBS.

The iShares $ Corp Bond Interest Rate Hedged UCITS ETF (LON: LQDH) and the UBS Barclays US Liquid Corporates Interest Rate hedged UCITS ETF (LON: UCDH) combine long positions in US dollar-denominated investment grade corporate bonds with short positions in Treasury bond futures contracts. This approach seeks to eliminate the underlying interest rate risk of the US liquid corporate bonds in the form of US Treasury bond yield risk. LQDH has $245m in AUM and a TER of 0.25% while UCDH has $800m in AUM and a TER of 0.23%.

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