Co-founder of Affari Miei
January 25, 2024
What are covered bonds? If you are looking for information on covered bond ETFs then you are in the right place.
You want to invest in ETFs because you are looking for a transparent instrument, which replicates an index, and which at the same time has very low management costs.
Do you want to opt for bond ETFs because they are safer?
First of all you need to know one thing: the bond market is diversified, even more so than the stock market, and in fact trying to juggle the various types of bonds is not a very simple thing.
If you wanted to invest in bonds, you could find yourself faced with: conservative government bonds, government bonds, bonds issued by companies therefore at high risk, securities issued by companies.
Covered bond ETFs are a particular type of fund, which invest in so-called covered bond.
They are passively managed funds that passively replicate the performance of the financial activity to which they are connected, and it is a relatively safe fund, now we will see why.
This article talks about:
A word on covered bonds
Secured bonds, also called covered bonds, are a credit security issued by a bank or another intermediary.
They differ from other bonds because they are characterized by a very low risk profile and high liquidity. Furthermore, unlike ordinary bank bonds, if the issuing bank were to fail their reimbursement is ensured by the possibility of taking action on highly liquid assets which are segregated, such as for example land and mortgage credits, or securities issued as part of securitization concerning credits of the same nature.
One important thing we need to remember about covered bonds is that they come with specific guarantees, which are provided by the issuing company.
These guarantees refer to the payment of coupons and the repayment of capital. Furthermore, in the event of default, the interests of the bondholders will be satisfied with the execution of the guarantees ancillary to the loan.
Covered bonds have a double level of protection, which allows them to have a low level of risk: the first level of protection is the repayment obligation of the issuer, the second is made up of the assets placed as collateral which bind a portion of the bank’s assets exclusively for the remuneration and repayment of the bond.
In addition to banks, funds of no less than 250 million euros can also issue covered bonds, and this is precisely the case that interests us, i.e. ETFs.
The three best ETFs on the Italian Stock Exchange
Now let’s see the best ETFs on the Italian Stock Exchange.
iShares Euro Covered Bond UCITS ETF
The iBoxx® EUR Covered index tracks euro-denominated corporate bonds with an investment grade rating, which have a minimum maturity of 1 year and an Investment Grade rating.
The size of the fund is large, at 1,235 million euros, and it was launched in August 2008, so it is a very mature fund.
The replication method is physical and has no currency hedging.
The fund is domiciled in Ireland, and the dividend policy is distributional, in fact coupons are distributed every six months to investors.
Annual management costs amount to 0.20%.
The data on volatility is interesting, since it is an average 1-year volatility, which stands at 4.00%.
The risk profile of this fund is 2, so it is a medium/low risk on a scale of 1 to 7. This is perfectly in line with the type of funds we are analyzing, since covered bonds ensure a level very low risk.
The geographical allocation sees France in first place with 24.52%, followed by Germany with 19.01% and Canada with 7.83%. Italy has 4.28%.
iShares Pfandbriefe UCITS ETF
The iBoxx® Pfandbriefe index tracks euro-denominated Pfandbriefe bonds of German issuers with a residual maturity of more than 1 year and an Investment Grade rating.
The size of the fund is large, equal to 601 million euros and it was listed in December 2004, so also in this case we are talking about a mature fund.
The replication method is physical, and has no currency hedging.
The fund is domiciled in Germany and the dividend policy is distributable, with coupons being distributed at least annually.
Management costs amount to 0.10% per year.
One-year volatility is 4.08%.
The risk profile is equal to 2on a scale from 1 to 7, so also in this case we are faced with a medium/low risk.
The effective duration is 4.42 years, while the weighted average maturity is 4.65 years.
iShares US Mortgage Backed Securities UCITS ETF
The Bloomberg US Mortgage Backed Securities index tracks US mortgage derivatives (MBS) issued by government-sponsored corporations.
The size of the fund is large and stands at 640 million euros, and was listed in May 2016.
The fund’s replication method is physical, and has no currency hedging.
The fund is domiciled in Ireland, and the dividend policy provides for distributioni.e. the coupons are distributed semi-annually to investors, who will therefore be able to count on a periodic income.
Management costs amount to 0.28% per year.
The risk profile for this ETF is 3on a scale of 1 to 7, so we are talking about a low risk.
The geographic allocation sees all bonds from the United States.
The weighted average maturity is 8.17 years.
Is it worth investing in covered bond ETFs?
We analyzed the ETFs present on the Italian Stock Exchange, trying to understand what it meant to invest in ETFs on covered bonds.
The three ETFs that I have presented to you all have a medium/low risk profile: in fact they all present a risk between 2 and 3. This risk range allows the investor to feel comfortable about the possibility of running into unpleasant surprises regarding his investment.
We certainly cannot expect exciting returns from these investments: if we opt for a safe and almost risk-free investment, consequently the returns we can expect cannot be so high.
If you decide to invest in ETFs on covered bonds you could certainly benefit from them: first of all you will be able to have greater diversification compared to the possibility of investing in a single security, and you will be more exposed to the markets.
A similar ETF in your strategy and therefore in your investment portfolio could prove to be an excellent hedge, as having a low risk you can be sure of owning a safe investment, even immune from Bail in. In fact, in the event of default, i covered bond they are always protected.
If your goal is to increase the performance of your investments, then this type of ETF is not for you, because the possibility of having good returns is truly almost nil.
It’s up to you to decide whether to focus on this type of fund; from a portfolio diversification perspective you could think about it to protect yourself.
I have talked about ETFs in numerous articles:
If you want to consult my reviews on the main tools, I suggest you take a look at section of the blog dedicated to ETFs.
If you want to start getting familiar with these tools, I invite you to download this report.
If you are looking for guides on investing, however, because your ideas are a little confused, here are other very useful resources for you:
Happy continuation on Affari Miei!
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