Two new debt ETFs arrive as Fed holds the easy-money line for now.
Invesco PowerShares and Deutsche Bank today are launching two income-focused ETFs that are each designed to address investors’ concerns about rising rates and paltry yields. At the same time, iShares is also launching two ETFs focused on markets that will transition from frontier to emerging markets later this month.
The PowerShares fund will focus on variable-rate preferred securities, while the Deutsche Bank ETF targets investment-grade subordinated debt.
The proposed funds come at a time when investors are bracing for rising interest rates as the Federal Reserve continues tapering its bond-buying program. The Fed has signaled that rates may rise earlier than expected in 2015.
PowerShares’ Variable Rate Fund
First, PowerShares is serving up its PowerShares Variable Rate Preferred Portfolio (VRP) that will track the Wells Fargo Hybrid and Preferred Securities Floating and Variable Rate Index. It has a market-capitalization-weighted benchmark that has exposure to preferred stocks and hybrid securities that pay floating- or variable-rate dividends or coupons, according to the regulatory filing.
Variable- or floating-rate securities pay interest at rates that adjust whenever a specified benchmark interest rate (i.e., the Libor or a T-bill rate) changes, float at a fixed margin above a generally recognized base lending rate, or are reset on specified dates (such as the last day of a month or calendar quarter).
VRP’s annual expense ratio is 0.50 percent, or $50 for every $10,000 invested, according to a regulatory filing.
DB Subordinated Debt ETF
Also, Deutsche Bank today is launching its db X-trackers Solactive Investment Grade Subordinated Debt Fund (SUBD), a subordinated corporate debt fund that will be designed to broaden index investors’ access to credit spread markets at a time of paltry yields.
SUBD is based on the Solactive Subordinated Bond Index, which tracks the investment-grade subordinated corporate bond market denominated in U.S. dollars. Subordinated securities are subordinated or “junior” to more senior securities of the issuer and are entitled to payment after other holders of that issuer’s debt, the filing said.
Junior subordinated securities generally rank slightly higher in terms of payment priority than both common and preferred stock of an issuer, but rank below other subordinated securities and debt securities.
What that means is that yields should be a bit higher than on the corporate debt in many ETFs now on the market. That may help the fund’s fortunes because yields have been so low in the years following the crash of 2008-2009 and because investors have clearly demonstrated an openness to find yield in unlikely places, such as in senior loans.
SUBD’s expense ratio is 0.45 percent, or $45 for every $10,000 invested, according to a regulatory filing.
Qatar, UAE ETFs
iShares today is also launching the iShares MSCI Qatar Capped ETF (QAT) and iShares MSCI UAE Capped ETF (UAE) on the NASDAQ. The firm is touting its new launches as the first ETFs to provide single country exposure to two countries that MSCI will graduate from frontier markets to emerging markets status at the end of May.
Qatar and the United Arab Emirates are the first Middle East countries to be promoted to emerging markets status due to the development of their securities markets and past and future expected steady growth, according to iShares. The International Monetary Fund has forecasted higher GDP growth for both countries than the broader developed markets.
UAE will to track the MSCI All UAE Capped Index, which is designed to measure the equity market in the United Arab Emirates across a broad range of market cap in the energy, financials and industrials sectors. In the same vein, QAT will track the MSCI All Qatar Capped Index, which is designed to measure the equity market in Qatar.
The four new launches bring to 65 the total number of launches year-to-date as issuers look to cement their place in the growing U.S.-listed ETF universe. There are currently 1,580 U.S.-listed ETFs managing $1.762 trillion in assets, according to data compiled by ETF.com Analytics.
OFF, which provides inverse exposure to an index comprising long positions in risk-on asset classes such as commodities and equities, and short positions in risk-off asset classes such as government bonds, is currently managing $10.5 million.
ONN, which tracks an index with 150 percent long positions in securities across asset classes that are expected to gain and 50 percent short in securities expected to lose when economic outlook is good, is currently managing 12.3 million.
Both ETNs were launched in November 2011.