Deutsche rolls out eurozone ‘Yield Plus’ corporate bond ETF

Jun 16th, 2016 | By | Category: Fixed Income

Europe’s second largest provider of exchange-traded funds Deutsche Asset Management has expanded its ‘Yield Plus’ ETF range with the launch of the db x-trackers iBoxx EUR Corporates Yield Plus UCITS ETF (Xetra: XDEP) that provides exposure to the euro-denominated corporate bond market.

Deutsche Asset Management expands fixed income smart beta suite with new emerging markets ETF

Martin Weithofer, Deutsche Asset Management’s Head of Strategic Beta.

The ETF directly invests in highest-yielding euro-denominated corporate bonds with investment grade status. Its underlying index is the Markit iBoxx EUR Corporates Yield Plus Index, which tracks approximately 800 bonds (the top 50% most attractive bonds in terms of corporate credit premium from a selection grouping of 1,600 investment grade bonds).

Investment grade bonds are debt securities that have been assigned a rating between BB- and AAA (or their equivalents) by at least two of the three major credit ratings agencies – Moody’s, Fitch and Standard & Poor’s. The ‘Yield Plus’ strategy also allows for bonds that were investment grade at the time of inclusion but have since been downgraded (colloquially known as ‘fallen angels’) up to a maximum of 20% of the fund’s assets under management.

Martin Weithofer, Deutsche Asset Management’s Head of Strategic Beta, commented in a statement: “With interest rates remaining at historically low levels, the search for yield in the fixed income market continues. The strategic beta corporate bond index that our new ETF tracks offers a significant yield pick-up versus it’s non-yield plus equivalent, with moderately increased risk characteristics and almost identical duration.”

As of 10 June 2016 the index has significant country exposure to France (14.5%), the UK (14.5%), the US (13.3%), Germany (12.7%) and Italy (8.9%). The weighted average duration is 5.3 years and the weighted average yield-to-maturity is 1.78%.

The ETF has a reduced total expense ratio of 0.10% until 31 December 2016. After this date, the all-in fee will revert to 0.25%.

The fund is the third to be launched in the ‘Yield Plus’ series which also includes the db x-trackers iBoxx Sovereigns Eurozone Yield Plus UCITS ETF (Xetra: XY4P) and the db x-trackers iBoxx Sovereigns Yield Plus 1-3 UCITS ETF (Xetra: XYP1) – two funds providing exposure to the highest yielding government bonds from investment-grade rated countries in the eurozone. The ETFs have a combined €2.8bn in assets under management as of 26 May 2016.

Deutsche has built up an extensive range of fixed income ETFs, a feature that has attracted strong net inflows as investors turn to the products for the enhanced diversification and liquidity benefits compared to buying bonds in the primary market. During 2015, fixed income ETFs recorded 35% of net inflows in Europe yet account for only 25% of total ETF AUM, highlighting the above average growth in the space.

Deutsche continues to be relatively active in launching new fixed income ETFs. The firm unveiled the db x-trackers iBoxx Eurozone Sovereigns Quality Weighted UCITS ETF (Xetra: XESQ) in December last year. The fund provides exposure to an index of eurozone sovereign bonds that have been weighted based on criteria linked to better quality issuers. More recently, Deutsche launched another smart beta ETF that tracks emerging markets sovereign debt, while weighting its constituents according to the credit quality of the issuers. The db X-trackers iBoxx USD Emerging Sovereigns Quality Weighted UCITS ETF (XQUA) is trading on the London Stock Exchange and Xetra.

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