Index giant brings US-style ETFs to Europe

BGI’s latest iShares addition, a US dollar fund, offers diversification into corporate bonds, writes Yuri Bender. Passive product specialist Barclays Global Investors (BGI) is expected to receive regulatory approval for the launch of a US dollar corporate bond exchange-traded fund (ETF), to be listed in London. This is a mutual fund which replicates an index, based on strict rules, allowing investors exposure to a vast swathe of the key issuers of US corporate bonds. This latest addition to BGI’s iShares family follows the high-profile launch of the iBoxx Euro Corporate Bond ETF, already trading in Frankfurt and London. The new product, named “iShares GS$ InvesTop Corporate Bond Fund”, is domiciled in Dublin to attract investors in the EU, but mirrors a US-domiciled fund which has grown to $2bn since July 2002. The US fund has won clients in Europe, but they have been hit by US withholding tax on monthly distribution of coupon income. The Dublin domicile of the new fund means there will be no American tax to pay. The new product is based on the Goldman Sachs US$ InvesTop index, composed of 100 US corporate bonds, limited to one per issuer in the interests of diversification. BGI chose the Goldman index because it is a live basket, whose price varies according to market sentiment during the day. This is a major improvement over the static, end-of-day snapshot common among some other providers. A rules-based structure allows investors to have more confidence about transparency, so the index is a fair reflection of the market at any time. ETFs can thus be competitively priced. Investors can trade it instantaneously in the same way as a stock or bond. Fees are capped at 20 basis points, compared with 100–200 basis points for an actively traded corporate bond mutual fund. Corporate bond demand “We are experiencing a lot of demand for corporate bonds, boosted by re-allocation from government and equity markets across euro, sterling and dollar classes, especially after recent collapses,” reveals BGI’s fixed income strategist, Elizabeth Para. “And with government bonds at a low level, investors need to look at corporate markets to pick up income.” While the fund was originally designed for institutional investors such as pension funds, BGI’s marketing team has been quick to promote its benefits to fund selectors and other distributors of products to high net worth individuals. American families living in Europe and requiring an income here for education fees or living expenses are expected to be users, as they need regular dividends, but their liabilities are in dollars.

Who will want to use? Distributor clients may include:

• Fund of funds managers wanting an ETF product or using an ETF for short-term corporate bond exposure.
• Fund selectors needing an alternative to closed-end investment trusts.
• Discretionary portfolio managers taking active positions to tilt a portfolio.