Pimco has with ETF provider Source launched what it claims is the first actively managed covered bond exchange traded fund, the Pimco Covered Bond Source UCITS ETF, whose guidelines reflect the Basel III rules on Level 2 assets.

Kristion Mierau, Pimco

Using the Barclays Euro Aggregate Covered 3% Cap Index as a benchmark, the ETF will be managed by Kristion Mierau, senior vice president and head of Pimco’s European covered bond portfolio management team.

“This expanding investment universe creates new opportunities for investors and fulfils their increasing demand for ‘safe assets’,” said Mierau. “In the current low interest rate environment, covered bonds offer attractive risk-adjusted yields and are potentially a compelling alternative to broad European government bonds, as the asset class has historically provided higher returns with lower volatility and lower sensitivity to changes in market yield levels.”

He added that at current spread levels covered bonds offer investors a more attractive and secure way to gain credit exposure than unsecured senior bank debt.

The guidelines for the ETF are for a minimum 80% to be invested in covered bonds. A maximum of 20% may be invested in corporate bonds rated at least AA-, and a maximum 10% to be invested in RMBS rated at AA- or better and in corporates bonds rated A+ to BBB-, with an ultimate parent cap of 5%. No debt from financial companies may be included, while sovereigns, supras and agencies are allowed.

The guidelines reflect the asset types eligible as Level 2 assets under the Basel III framework and Pimco noted in a statement on the ETF that covered bonds are considered “liquid assets” for Liquidity Coverage Ratio (LCR) requirements.

Duration may deviate plus or minus 2 years from the benchmark. The maximum foreign currency exposure is 10%.

The ETF is traded on Deutsche Börse and has a first year annual management fee of 0.38%.

“We have designed this product as a unique solution for a wide range of investors who seek access to the covered bond market, combining PIMCO’s active approach to covered bonds with the intra-day pricing and daily portfolio holdings transparency of the ETF vehicle,” said Howard Chan, vice president and product manager for Pimco’s European ETF products.