Credit Default Swap ETFs Coming To Market


Unlike other products now on the U.S. market, a new family of proposed ETFs from ProShares that is focused on credit default swaps (CDSs) will allow U.S. investors a 'pure play' to weigh in on credit quality for the first time.

Bond issuers, especially low-credit issuers, have benefited immensely from the Federal Reserve's low-rate policy as yield-starved investors have crept down the credit spectrum in search of real return. It's not just U.S. companies that have loaded up on debt either, "global bond issuance is up a stunning 53 percent from the same period in 2012," according to CNBC.

But after a long sustained upward move in bond prices, some are nervous this beast might turn around to bite them. ProShares' filing seems to capitalize on investor anxiety and be an attempt to placate it.

The documents filed with the SEC outline plans for eight CDS ETFs that offer long or short positions on the credit of either investment-grade or high-yield issuers in Europe and North America. They're unique because, if brought to market, they would offer the most direct way to play credit risk.

The eight ETFs referenced in the filing are as follows:

  • ProShares CDS Long North American HY Credit ETF
  • ProShares CDS Short North American HY Credit ETF
  • ProShares CDS Long North American IG Credit ETF
  • ProShares CDS Short North American IG Credit ETF
  • ProShares CDS Long European HY Credit ETF
  • ProShares CDS Short European HY Credit ETF
  • ProShares CDS Long European IG Credit ETF
  • ProShares CDS Short European IG Credit ETF

The filing is timely too:Bond prices appear at the ready to crash downward if Ben Bernanke simply utters "taper" one more time.

Since the crash of 2008, well-rated and poorly rated companies alike have exploited the opportunity to borrow money at ultra-low rates, but one has to wonder if a day of reckoning is coming.

After all, many of these companies are borrowing at near-record low spreads over risk-free Treasury securities-a trend that is bound to reverse.

One glance at a chart of how the cost of borrowing has dropped drastically over the past three years makes it obvious why so many companies, especially the less creditworthy, have loaded up on cheap debt. Check out the effective yield on high-yield (junk) bonds, which we can use a proxy for borrowing cost:

Don't forget to check's ETF Data section.

Copyright ® 2013 IndexUniverse LLC . All Rights Reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , ETFs

Referenced Stocks: THHY



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