Invesco has seen its CoCo bond ETF break the $1bn assets under management (AUM) barrier as investors flock to higher-yield fixed income strategies. 

The Invesco AT1 Capital Bond UCITS ETF (AT1) has doubled since the peak of the coronavirus pandemic in March 2020 with investors piling around $500m into the strategy.

The AT1 (CoCo bond) market now has $140bn-worth of issues denominated in US dollars, with investors seeking products offering higher income potential versus the lacklustre yields currently offered by developed market government bonds. 

The difference between contingent convertible (CoCo) bonds and other high yield vehicles is that yields are not driven by the risk level of the issuer, but rather the fact that loans can be converted into equity should the issuer’s capital drop below a pre-determined level. 

Commenting on the inflows, Paul Syms, head of EMEA ETF fixed income product management at Invesco, said: “Our ETF has grown to such scale that it has opened the door to larger investors who may have holding limits and require a vehicle that can accommodate bigger trade sizes.

“In fact, AT1 is the only ETF in Europe that offers the scale and liquidity for institutional investors to gain diversified, cost-effective exposure to AT1s.” 

Syms added that although the firm’s CoCo bond ETF is the largest of its size in the European market, its AUM makes up less than a percent of the total value of USD-denominated AT1s – which means there is still considerable growth potential. 

Furthermore, the firm highlighted the slim margins in performance between passive and actively managed CoCo bond products, with a 78% pairwise correlation between AT1 bonds held between June 2018 and March 2020, and a 100% correlation at sell-off. 

Gary Buxton (pictured), head of EMEA ETFs and indexed strategies at Invesco, said: “AT1s are an interesting example, as they have transitioned from being purely an active play to now being arguably more suited to a passive approach. The recent flows into our ETF are testament to investors recognising and taking advantage of these developments.

“We will continue building out our ‘innovative income’ range as we identify opportunities that complement more traditional areas of the fixed income market.” 

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