As the exchange traded products industry has grown by leaps and bounds, fund issuers have brought an increasing array of laser-focused products to market. Some of these ETFs have gained traction with investors. Others have not. However, there is no denying that thanks to ETFs, investors can get exposure to previously hard-to-access asset classes such as emerging markets junk bonds and Chinese consumer stocks.
Credit default swaps could be the next niche play put to the test in the ETF world. ProShares, the Maryland-based ETF sponsor known primarily for its lineup of inverse and leveraged funds, could test the waters with eight credit default swaps ETFs. [Inverse Bond ETFs See Action on Rising Yields]
In a filing with the Securities and Exchange Commission, ProShares outlined plans for the following eight ETFs: The 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 HY Credit ETF, ProShares CDS Long European IG Credit ETF and the ProShares CDS Short European IG Credit ETF.
Traders purchase CDS to hedge against possible issuer default on bonds. CDS buyers pay sellers until the contract matures. In turn, the seller agrees to compensate the buyer in the event of default.
ProShares said in the filing the ETFs will be based on credit derivatives indexes. For example, the ProShares CDS Long North American HY Credit ETF will utilize centrally cleared index-based credit default swaps or, if available, exchange-listed futures contracts, depending on which instruments have the most liquidity or otherwise exhibit the most optimal trading characteristics,” according to the filing.