8 Bond Factor ETFs Launch

Invesco rolled out a family of eight fixed-income ETFs last week that incorporate factors into their methodologies. The fund and their expense ratios are as follows:

• Invesco Emerging Markets Debt Defensive ETF (IEMD), 0.29%
• Invesco Emerging Markets Debt Value ETF (IEMV), 0.29%
• Invesco High Yield Defensive ETF (IHYD), 0.23%
• Invesco High Yield Value ETF (IHYV), 0.23%
• Invesco Investment Grade Defensive ETF (IIGD), 0.13%
• Invesco Investment Grade Value ETF (IIGV), 0.13%
• Invesco Multi-Factor Core Fixed Income ETF (IMFC), 0.12%
• Invesco Multi-Factor Core Plus Fixed Income ETF (IMFP), 0.16%

The funds all track in-house indexes provided by Invesco’s indexing division, which first got rolling in 2015, but has ramped up its efforts. Andrew Waisburd, Ph.D. is head of the group, coming from a quantitative investing background at Invesco.

“It was amazing to me how much the factors in the fixed-income world mirror the factors in the equity world,” Waisburd said of the initial development efforts. “We’re all much more familiar with equity factors and the use of factors in the equity space, but the same types of characteristics that you would think work and make intuitive sense in the equity space also make sense in the fixed-income space. You might capture them differently, but it’s the same type of outcome.”

“The indices we’re talking about are called value and defensive, but what we’re really talking about is value and quality,” he said of the indexes underlying the new ETFs. “These are bonds that are trading more cheaply relative to their peers, and these are bonds that are higher quality relative to their peers.”

Emerging Markets

IEMD and IEMV select their components from more than 20 emerging markets. Both require that issuers be rated investment grade, have at least $500 million outstanding, make coupon payments and have between two and 10 years to maturity. All securities are issued in U.S. dollars, and only the five largest bonds from each issuer are eligible for inclusion, the prospectus says.

IEMD’s underlying index methodology assigns each security a quality score based on its maturity, weighted at 75%; and credit rating, weighted at 25%. Securities are ranked according to their quality scores, and the top 40% are selected for inclusion. The prospectus notes the index typically includes 100-300 securities weighted by modified market value.

IEMV has the same requirements for eligibility to IEMD. The methodology assigns quality and value scores to each of the issues, creating a composite score that weights the value score at 90% and the quality score at 10%. Based on that composite quality and value score, the methodology selects the top 40% of securities for a total component count of 100-300 securities weighted by modified market value, the document says.

High Yield, Investment Grade

IHYD and IHYV cover junk bonds issued in U.S. dollars by U.S. companies. Eligible securities must have at least $400 million, have two to 10 years to maturity and be the largest bond from the issuer. The two high-yield funds implement the same quality and value scoring systems as the two emerging market funds, as well as the same selection parameters. The two funds also have 100-300 securities, but the indexes equally weight them rather than weighting by market cap, according to the prospectus.

IIGD and IIGV use similar eligibility, scoring and selection parameters as the high-yield funds, except the securities must be investment grade and have at least $600 million outstanding. However, the underlying indexes can have as few as 50 components, also equal weighted, the document says.

Multifactor

The two multifactor funds track benchmarks combining multiple in-house indexes.

IMFC’s underlying benchmark includes the Invesco U.S. Fixed Rate 30-Year MBS Index, weighted at 40%; the Invesco Investment Grade Defensive Index weighted at 25%; the Invesco U.S. Treasury 1-3 Years Index weighted at 20%; the Invesco U.S. Treasury 10-30 Years Index weighted at 10%; and the Invesco Investment Grade Value Index weighted at 5%. Ultimately, the full benchmark includes 400-1,000 securities.

IMFP is very similar, except it incorporates an international element via two emerging market subindexes. Its composite benchmark includes the Invesco High Yield Defensive Index weighted at 30%; the Invesco Investment Grade Defensive Index weighted at 20%; the Invesco U.S. Fixed Rate 30-Year MBS Index weighted at 20%; the Invesco Investment Grade Value Index weighted at 10%; the Invesco U.S. Treasury 10-30 Years Index weighted at 10%; the Invesco Emerging Markets Debt Defensive Index weighted at 5%; and the Invesco Emerging Markets Debt Value Index weighted at 5%. In total, the benchmark represents 500-1,000 securities.

Contact Heather Bell at [email protected]