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Invesco buffs up fixed income smart beta

Invesco is listing a family of smart beta fixed income funds that offer an innovative play on fixed income smart beta.

All of the new listings will self-index, in yet another sign that ETF providers are tiring of the high fees and margins charged by big index houses. And all will aim to tap into the accelerating migration from active to passive in the US fixed income market.

The emerging markets debt trackers will invest only in US dollar-denominated bonds that have a credit rating of B- or higher, face value to remain of $500m-plus, and have at least two years until maturity. Both IEMD and IEMV build in a quality screen, which looks at maturity and credit rating. Bonds with fewer years to maturity receive a higher maturity factor score. Credit ratings are based on the average ratings from a number of agencies. The maturity and credit scores are then weighted 75% and 25%, respectively to come up with an overall quality score. Only bonds with the top 40% by quality are put in the index.

The difference between the two is that IEMV also builds in a value screen, which is calculated based on bond’s option adjusted spreads. IEMV then weights value and quality 90% and 10%.

The high yield and investment grade listings repeat the exercise. The high yield funds gun after US high yield bonds, with ratings higher than B- but lower than BBB-. Investment grade US bonds are defined by the prospectus as those with ratings upwards of BBB-.

But the multifactor offer something new

The multifactor ETFs offer up something pioneering. Both track an “index of indexes,” the prospectus says, where the index is made up of sub-indexes representing different fixed income segments and factor loadings.

For IMFC, the index is comprised of component securities of the following indexes, with corresponding approximate weightings:

(i)             Invesco U.S. Fixed Rate 30-Year MBS Index (40% weight);

(ii)            Invesco Investment Grade Quality Index (25% weight);

(iii)          Invesco U.S. Treasury 1-3 Years Index (20% weight)

(iv)           Invesco U.S. Treasury 10-30 Years Index (10% weight)

(v)            Invesco Investment Grade Value Index (5% weight)

The MBS index provides exposure to 30-year mortgages issued by Fannie Mae and Freddie Mac that were produced in the past three years. The investment grade indexes are the same as in the abovementioned products, while the fund uses two separate Treasury indexes to ensure a shorter maturity, by weighting to shorter maturity Treasuries.

IMFP offers a completely different weighting scheme and builds in a few additional indexes, again used by products mentioned above.

(i)             Invesco High Yield Quality Index (30% weight)

(ii)            Invesco Investment Grade Quality Index (20% weight)

(iii)          Invesco U.S. Fixed Rate 30-Year MBS Index (20% weight)

(iv)           Invesco Investment Grade Value Index (10% weight)

(v)            Invesco U.S. Treasury 10-30 Years Index (10% weight)

(vi)           Invesco Emerging Markets Debt Quality Index (5% weight)

(vii)         Invesco Emerging Markets Debt Value Index (5% weight)