DWS has introduced its first fixed income ETFs in the US to incorporate environmental, social, and governance (ESG) factors.
Luke Oliver, Head of Index Investing for the Americas at DWS.
The funds, which have been created by repurposing a trio of unloved existing listings, provide exposure to USD-denominated investment-grade, high-yield, and emerging market sovereign bonds.
The ETFs have been listed on Cboe BZX Exchange and distribute income on a monthly basis.
The Xtrackers Bloomberg Barclays US Investment Grade Corporate ESG ETF (ESCR US) has been created out of the Xtrackers Investment Grade Bond – Interest Rate Hedged ETF (IGIH US).
The fund tracks the Bloomberg Barclays MSCI US Corporate Sustainability SRI Sector/Credit/Maturity Neutral Index which is based on the parent Bloomberg Barclays US Corporate Index. This parent index consists of fixed-rate, US dollar-denominated debt from high-quality corporate issuers worldwide. Bonds must have a minimum issue size of $300m and at least one year remaining to maturity to be eligible for inclusion.
The ESG index methodology excludes issuers embroiled in ESG-related controversies as well as those involved in adult entertainment, alcohol, gambling, tobacco, weapons, nuclear power, and genetically modified organisms.
Issuers are then assigned an ESG rating from MSCI ESG Research which indicates its ability to deal with ESG risks relative to sector peers. Firms with ratings below BBB (average) are excluded.
The remaining constituents are weighted so as to approximate the properties of the parent index across three factors: sector, maturity, and rating.
The ETF has $10m AUM and comes with an expense ratio of 0.15%.
The Xtrackers JP Morgan ESG USD High Yield Corporate Bond ETF (ESHY US) has been created from the Xtrackers High Yield Corporate Bond – Interest Rate Hedged ETF (HYIH US).
The fund tracks the JP Morgan ESG DM Corporate High Yield USD Index which is based on the parent JP Morgan DM Corporate High Yield USD Index. The parent index includes a range of bond types (fixed, floating, step-up, amortizing, etc.) from high-yield corporate issuers in developed markets. Eligible securities must be denominated in US dollars with at least $250m outstanding and more than two years until maturity. The parent index is weighted by market value outstanding.
In constructing the ESG index, the methodology first excludes issuers involved in thermal coal, weapons, and tobacco, as well as those that are violators of the UN’s Global Compact principles.
The remaining issuers are assigned a broad ESG score using analytics data from RepRisk and Sustainalytics. The securities in the index are then ranked and sorted into quintiles based on the ESG rating of its issuer. Securities that are categorized as “green” by the Climate Bond Initiative are upgraded to the next higher quintile from where it was originally assigned.
Securities in the lowest quintile are removed from the index while the weight of the first and second quintiles are increased at the expense of the third and fourth quintiles.
The ETF has $20m AUM and comes with an expense ratio of 0.20%.
The Xtrackers JP Morgan ESG Emerging Markets Sovereign ETF (ESEB US) has been created out of the Xtrackers Emerging Markets Bond – Interest Rate Hedged ETF (EMIH US).
The fund tracks the JP Morgan ESG EMBI Global Diversified Sovereign Index which is based upon the JP Morgan EMBI Global Diversified Sovereign Index. The parent index covers fixed and floating-rate debt denominated in US dollars from emerging market issuers with at least 2.5 years remaining to maturity and a face value of at least $500 million outstanding.
A country is classified as an emerging market by JP Morgan if its gross national income per capita is below $18,769 and its long-term foreign currency sovereign credit rating is below investment grade at A-/A3 for three consecutive years. A country loses its EM status if its GNI per capita rises above this ceiling or if its credit rating is A- or above for three consecutive years.
The ESG methodology is the same as described above for the high-yield corporate bond fund. The index removes issuers from controversial industries as well as the bottom quintile of securities when ranked by ESG score. It then weights the remaining issues to favour green bonds as well as those from issuers with higher ESG scores
The ETF has $15m AUM and comes with an expense ratio of 0.35%.
The new ETFs complement DWS’s existing five ESG equity ETFs in the US which collectively house roughly $1.8bn in AUM. The vast majority of those assets are held in the Xtrackers MSCI USA ESG Leaders Equity ETF (USSG US).
Luke Oliver, Head of Index Investing for the Americas at DWS, commented, “We believe ESG will become increasingly important for investors, especially as the coronavirus pandemic brings greater attention to the investments needed to make the global economy, society, and environment more sustainable.
“Sustainability has always been one of DWS’s core foundational values, and our growing Xtrackers ETF suite continues to deliver ESG solutions across core benchmarks, which can help align client portfolios with business models at the intersection of shareholder and stakeholder value creation.”