Disassembling a new FXRD dividend fund

Earn more in rubles! Trading in a new ETF from FinEx with the ticker FXRD has started on the Moscow Exchange. The new instrument is almost a «twin» of the already well-known FXFA fund, but with two key differences: the fund has a ruble hedge, and, unlike all other FinEx funds, FXRD assumes regular income payments to its investors (yes, you understood everything correctly: FXRD pays dividends). This article summarizes the main features of the new ETF.

FXRD is the fifth ETF from FinEx to have a built-in ruble hedging mechanism. The main function of the ruble hedge is to protect against changes in the exchange rate. To ensure such protection, a currency swap contract is concluded between the fund and the counterparty bank for the amount of assets or part of the fund’s assets with automatic prolongation. Simply put, the yield is converted from dollar to ruble.

At the same time, investors in FXRD can count on additional profitability due to the positive difference between the ruble and dollar rates. This is especially true now, when the Bank of Russia is actively tightening its monetary policy by raising the key rate, and the Fed is still keeping the rate at the same level. The greater the difference in rates, the greater the «addition» to the profitability.

Read more about hedging in the material.

How would such an instrument behave in the past? We recalculated the average annual return, and it impressed us: 14% over 7 years! More about how exactly they counted, wrote in

Over the past nine and a half years, the hedged version of the FXFA fund (calculated using all available historical data) has brought an impressive average annual ruble return of 14.6% (Figure 2). For comparison: the previous leader in terms of profitability among bond funds with a hedge — FXIP — on the same horizon would bring investors only 9.4% per annum, and the ruble indexes of OFZ and corporate bonds — 8.8-8.9% each. A similar picture is observed for other periods.

Another important feature of FXRD is its regular dividend payments twice a year. FinEx uses a transparent mechanism for calculating dividend yields that investors can use to calculate future payments.

The semi-annual dividend will be calculated based on the average key rate of the Central Bank of the Russian Federation for six months before the dividend announcement. Also, +150 basis points (1.5 percentage points) of the premium will be added to the variable part of the yield, reflecting the spread between the average yield of securities in the bond portfolio and the risk-free dollar rate (the spread is constant). If the Bank of Russia maintains the rate at the current level until the end of 2021, then the size of the first dividend will be 8% in annual terms (if it rises to 7%, as the market now expects, then the dividend will grow to 8.25%). This is significantly higher than you can get now on average for a deposit: the typical rate is 5.3%.

In the analytical

Since the launch of FXFA on April 19, 2021, its composition has changed 4 times (the index is rebalanced on a monthly basis on the last business day of the month). Let’s take a look at the main changes at the end of July.

The composition of the fund follows the Solactive USD Fallen Angel Issuer Capped Index. According to the methodology, the index can only include companies from developed markets, whose rating has been downgraded from investment to speculative over the past 5 years. At the same time, the index cannot include bonds with a rating close to «junk», that is, below BB- (Figure 3).

The index methodology also imposes restrictions on the minimum level of securities liquidity and maturity. Thus, the volume of the issue should be more than USD 400 million, and the maturity period should be more than 1 year. Due to these restrictions, the index and the fund include bond issues of the largest US companies, such as FirstEnergy, Apache, Occidental Petroleum, Kraft Heinz Foods and others. The top 5 issuers (not issues) account for almost 40% of the composition of FXFA / FXRD funds (Figure 4). To ensure the best diversification, the index methodology also provides for limiting the share of one company to 8%. If during the next rebalancing the share of one issuer in the total composition of the index exceeds 8%, then the weight of this issuer is limited by the threshold value (8%), and the excess weight is distributed proportionally among the rest of the issuers. The process is repeated until there is no single issuer with a share above 8%. Other index providers that calculate the Fallen Angels asset class bond indexes have a similar weighting methodology.

A quarter of the composition of FXFA / FXRD funds is occupied by companies from the energy sector. One fifth — durable goods and almost 12% — consumer goods (Figure 5). These are industries that are most likely to do well during a crisis, so such investments can be considered defensive.

For more information about fallen angels and the methodology of the Solactive USD Fallen Angel Issuer Capped Index, according to which FXFA and FXRD funds are formed, read our analytical review “