The ProShares [profile] team is claiming another ETF industry first. Michael Johnston writes for ETFdb [story] that the Covered Bond ETF (COBO) will be launched this week, seeking to replicate the BNP Paribas Diversified USD Covered Bond Index.
A relatively new innovation for the market, covered bonds -- which were developed in Europe but were first introduced in the U.S. money market in 2006 -- used to have high credit ratings because of the pool of assets that backed them until the recent financial crisis, ETFdb explains.
The expense ratio for this new offering is 35 basis points.
Company Press Release
ProShares Launches Only Corporate Bond Fund1 With Substantially All Assets AAA-Rated2
New ETF Provides U.S. Investors Access to Covered Bonds
BETHESDA, MD, MAY 23, 2012—ProShares, a premier provider of alternative exchange traded funds (ETFs), today announced the launch of ProShares USD Covered Bond (NYSE: COBO). This new ETF is the only corporate bond fund1—mutual fund or ETF—in the U.S. with substantially all of its assets rated AAA.2 COBO lists on NYSE Arca today.
COBO invests in covered bonds, a type of collateralized corporate debt typically issued by non-U.S. financial institutions. Covered bonds are a popular investment outside the U.S. but not broadly accessible in the U.S. until today.
"Many investors are interested in high credit quality bonds, but the supply of AAA-rated corporate debt in the U.S. is very limited," said Michael L. Sapir, Chairman and CEO of ProShare Advisors LLC, ProShares' investment advisor. "COBO, a first-of-its-kind ETF, fills the gap by accessing the highest-rated segment of the $3 trillion,3 240-year-old4 covered bond market."
COBO seeks to match the performance of the BNP Paribas Diversified USD Covered Bond Index, before fees and expenses. The index tracks the performance of a portfolio of AAA-rated covered bonds, which are denominated in U.S. dollars. Each bond must be AAA-rated by at least one independent rating agency.
More about Covered Bonds
The first covered bond was created in 1769 in Prussia by Frederick the Great in the aftermath of the Seven Years' War. In 1900, the German "Mortgage Bank Act" came into effect, setting up the essential principles that govern much of the covered bond market today.5 Since then, issuance of covered bonds in Europe and other parts of the world has grown significantly. The global covered bond market is estimated to be approximately $3 trillion outstanding.
High Credit Quality
Covered bonds are different from typical U.S. corporate debt in that, in the event of a default, covered bondholders not only have a senior unsecured claim against the issuer but also a preferential claim to a segregated, actively maintained "cover pool" of assets. The dual coverage from the issuer and the cover pool typically makes covered bonds a high credit quality investment. COBO focuses exclusively on the highest-rated covered bonds.
Currently, AAA-rated covered bonds have higher yields than U.S. Treasury and AAA-rated U.S. corporate debt of similar duration.6
ProShares is the country's fourth most successful exchange traded fund (ETF) company, with 133 funds and more than $23 billion in assets.7 ProShares' lineup includes the largest family of geared (leveraged and inverse) ETFs.8 ProShare Advisors and ProShare Capital Management are affiliated with ProFund Advisors, which was founded in 1997. Together, they manage more than $28 billion in ETF and mutual fund assets.9
1 Publicly available fund. Source: Morningstar.
2 AAA ratings are as of the time of index rebalancing. The Fund’s index considers ratings from Fitch, Standard & Poors and Moody's. To be considered AAA-rated, a bond must satisfy one of the following: 1) The bond is rated by all three agencies, and is rated AAA by two of them; 2) The bond is rated by only two agencies, and is rated AAA by both of them; 3) The bond is rated by only one agency, and is rated AAA.
3 Barclays Global Covered Bond Index guide, September, 2011, ProShares.
4 Goldman Sachs "Covered Bond" presentation, March, 2011.
5 LBBW Credit Research "Covered Bonds—European Banks' Secret Funding Weapon," June 2010.
6 As of May 18, 2012. Source: Bloomberg, Barclays, BNP, ProShares. Past performance does not guarantee future results.
7 Source: Financial Research Corporation, based on analysis of organic net sales of U.S. exchange traded products (as of 6/30/2011). Assets as of March 31, 2012.
8 Source: Lipper, based on a worldwide analysis of all known providers of funds in these categories. The analysis covered ETFs and ETNs by the number of funds and assets, as of June 30, 2011.
9 Assets as of March 31, 2012.
Investing involves risk, including the possible loss of principal. ProShares are non-diversified and each entails certain risks, which may include imperfect benchmark correlation and market price variance, that can increase volatility and decrease performance. Bonds will decrease in value as interest rates rise. The fund may be adversely affected by economic uncertainty experienced by various members of the European Union. International investments may also involve risk from differences in generally accepted accounting principles and from economic or political instability. For more on correlation, price variance and other risks, please read the prospectus.
The fund will typically invest in privately placed covered bonds, including those which may be resold only in acccordance with Rule 144A under the Securities Act of 1933, as amended. Privately issued securities are restricted securities that are not publicly traded, and may be less liquid than those that are publicly traded. The fund may not be able to redeem or resell its interests in a covered bond at an advantageous time or at an advantageous price, which may result in a loss to the fund. While covered bonds are secured by a pool of assets, there is no guarantee that the cover pool will adequately or fully compensate investors in the event that an issuer defaults on its payment obligations. Because the fund’s investments in covered bonds may be secured by a pool of financial assets that include mortgages and public-sector loans, the fund may be indirectly exposed to the risks posed by mortgages and/or public-sector loans.
"BNP Paribas®" and "BNP Paribas Diversified USD Covered Bond IndexTM" are trademarks of BNP Paribas and have been licensed for use by ProShares. ProShares have not been passed on by BNP Paribas as to their legality or suitability. ProShares based on the BNP Paribas Diversified USD Covered Bond Index are not sponsored, endorsed, distributed or advised by BNP Paribas or its affiliates, and they make no representation regarding the advisability of investing in ProShares. BNP PARIBAS AND ITS AFFILIATES MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO PROSHARES. NEITHER BNP PARIBAS NOR ITS AFFILIATES GUARANTEE THAT THE BNP PARIBAS DIVERSIFIED USD COVERED BOND INDEX HAS BEEN ACCURATELY CALCULATED AND NO SUCH PARTY SHALL HAVE ANY LIABILITY FOR ANY ERROR IN SUCH CALCULATION.
Carefully consider the investment objectives, risks, charges and expenses of ProShares before investing. This and other information can be found in their summary and full prospectuses. Read them carefully before investing. Obtain them from your financial adviser or broker/dealer representative or by visiting ProShares.com.
ProShares are distributed by SEI Investments Distribution Co., which is not affiliated with the funds' advisor or sponsor.