ProShares of Bethesda, Maryland, has launched the first ETF in the U.S. with dollar-denominated covered bonds from non-U.S. banks — its new USD Covered Bond ETF, which started trading on May 23 under the ticker symbol COBO.

So far, with $13 million in assets, most of the 36 covered bonds in its portfolio are from Canadian banks, with a weighted average maturity of 3.33 years and an average yield to maturity of 1.48 percent.

Canada is still a AAA country, and that’s significant to the ability of its banks to float AAA covered bonds. Because covered bonds are collateralized — backed by dedicated pools of loans that remain on the banks’ balance sheets — and they’re also collateralized at slightly more than 100 percent, as a cushion against defaults, the bonds are typically rated AAA, even when the issuing banks are a notch or two lower. But there’s one big caveat: The sovereign rating of the issuing bank’s country also has to be AAA. ....

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