Invesco has launched five ETFs that track US government bond indices. One of these tracks US government bonds with maturities between one and three years, one tracks bonds with maturities between three and seven years, and two track bonds with maturities between seven and 10 years. Invesco has also launched an ETF that tracks US Treasury bonds with different maturities.
Invesco US Treasury Bond 7-10 Year UCITS ETF GBP Hedged (TRXS) has an ongoing charge of 0.1 per cent. The four other funds charge 0.06 per cent, which significantly undercuts the fees of similar products. For example, iShares $ Treasury Bond 1-3yr UCITS ETF (IDBT) charges 0.2 per cent and Vanguard USD Treasury Bond UCITS ETF (VUTY) charges 0.12 per cent.
US government bonds have come more into favour in recent months following four interest rate rises by the US Federal Reserve in 2018 and its unwinding of quantitative easing. This has resulted in the yield on 10-year US Treasury bonds increasing to 3.13 per cent, higher than 10-year UK gilts' 1.63 per cent yield. However, there are now only expected to be two further US interest rate rises in 2019, and this could limit how much further yields rise and the potential for capital depreciation. But US Treasury bonds are still considered to be a safe-haven asset that could help mitigate downside in investment portfolios.
New ETFs
| ETF | Ongoing charge (%) | Yield (%) | Currency |
| Invesco US Treasury Bond 1-3 Year UCITS ETF (TR3G) | 0.06 | 2.52 | GBP |
| Invesco US Treasury Bond 3-7 Year UCITS ETF (TR7G) | 0.06 | 2.52 | GBP |
| Invesco US Treasury Bond 7-10 Year UCITS ETF (TRXG) | 0.06 | 2.66 | GBP |
| Invesco US Treasury Bond 7-10 Year UCITS ETF GBP Hedged (TRXS) | 0.1 | 2.66 | GBP |
| Invesco US Treasury Bond UCITS ETF (TRSG) | 0.06 | 2.61 | GBP |
| Tabula European ITraxx Crossover Credit UCITS ETF (TECC) | 0.4 | 3.99 | EUR |
Source: Invesco, Tabula
Tabula, a relatively new provider, has launched a European corporate bond ETF that invests in credit default swaps rather than bonds. Credit default swaps are insurance contracts taken out by lenders to insure themselves against the risk of default by borrowers. The contracts pay a regular income, similar to a bond.
Tabula European iTraxx Crossover Credit UCITS ETF (TECC) aims to replicate iTraxx Crossover Credit index by physically buying credit default swaps for European high-yield companies. This approach should limit investors' exposure to interest rate risk in the European credit market.
Tabula said: “Unlike traditional high-yield bond funds, which have to manage the risk of illiquidity in individual bond holdings, trading credit default swap index exposure concentrates positions in one highly liquid contract that tends to attract increased turnover in volatile markets.”
The ETF yields around 3.9 per cent, but does not yet have a sterling share class. It has a charge of 0.4 per cent.
Michael John Lytle, chief executive officer at Tabula, said investors tend to worry about owning high-yield bonds via passive funds in and around times of market stress, and many move into short-duration bonds which limit volatility and the risk of interest rates rising.
“Using credit default swap crossover indices offers a relatively stable, full five-year credit spread duration, but with limited interest rate exposure and tight bid-offer spreads,” he added.
European high-yield bonds have been through an unusual period over the past three years, with their value soaring in 2016 and yields falling. This was linked to the equity market bull run and global economic positivity, when high-yield bond performance was more correlated to equities than government bonds. By May 2017, the yield on European high-yield bonds had fallen below the yield offered by equities. But by October 2017 yields plateaued and started rising towards the end of 2018.
The risk with high-yield debt and credit default swaps is that companies begin defaulting on loans towards the end of the credit cycle. However, Andrew Jackson, head of fixed income at Hermes Investment Management, said the European market currently offers lower prices and lower risk of defaults than the US, with a default rate of 1.5 per cent versus 2.7 per cent, respectively.
Last year a record number of new ETFs were launched on the London Stock Exchange, with more than 300 listings in contrast to 177 a year before. Research company Morningstar says that new flows into UK-listed ETFs were over £32bn during the first 11 months of 2018.
