New Bond ETF Has You Covered

by Kyle Woodley | June 4, 2012 10:47 am

May finished out as a pretty ho-hum month for exchange-traded product launches — just one fund came to market in the final week, bringing the month’s total to a paltry seven.

The ProShares USD Covered Bond (NYSE:COBO[1]) is, unsurprisingly, a hail to investors’ increasing hunger for bonds[2] as the markets have hit an aggressively risk-off lull. The fund tracks the BNP Paribas Diversified USD Covered Bond Index, which consists of U.S. dollar-denominated “covered bonds” — debt that’s secured by a segregated pool, or “cover pool,” of financial assets, typically mortages or public sector loans — rated AAA or AAA equivalent.

This means that even if the issuing financial institution defaults, the bonds are supported by this “covered pool,” which usually is maintained by the issuer itself. Consider it a security blanket of sorts. Plus, the very nature of the high-rated debt makes COBO a “safer” investment.

Of course, the downside of such “safe” investment is that you can expect much lower yields. COBO’s average yield to maturity is around 1.5% — pretty much in line with the currently cellar-dwelling T-Note.

A large swath of COBO’s holdings include debt from Canadian banks such as Toronto-Dominion Bank (NYSE:TD[3]) and Bank of Nova Scotia (NYSE:BNS[4]), though it also folds in Britain’s HSBC (NYSE:HBC[5]), Switzerland’s Credit Suisse (NYSE:CS[6]) and Australia’s Westpac (NYSE:WBK[7]), among others.

COBO joined additions from the previous week, which included two dividend-focused exchange-traded notes and a sustainable business ETF[8]. To date, 112 new funds have been launched this year, according to[9].

Update: Make that eight, good for 113, and an apology. Exchange Traded Concepts launched the AlphaClone Alternative Alpha ETF (NYSE:ALFA[10]) last week, too.

The fund is designed to give investors exposure to hedge fund alpha, minus the hedge fund. For 0.95% in fees, ALFA tracks the AlphaClone Hedge Fund Long/Short Index, which selects long positions from hedge funds’ public disclosures using AlphaClone’s proprietary Clone Score ranking of manager efficacy.

Of course, investors should remember that ALFA is tracking hedge fund positions’ after they have been disclosed, not after they’ve been initiated, so there’s a serious risk that it will be constantly late to the game.

Kyle Woodley[11] is the assistant editor of[12]. As of this writing, he did not hold a position in any of the aforementioned securities. Follow him on Twitter at @KyleWoodley[13].

  1. COBO:
  2. increasing hunger for bonds:
  3. TD:
  4. BNS:
  5. HBC:
  6. CS:
  7. WBK:
  8. two dividend-focused exchange-traded notes and a sustainable business ETF:
  10. ALFA:
  11. Kyle Woodley:
  13. @KyleWoodley:

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