DWS has launched a pair of ETFs in Europe – the Xtrackers EUR Corporate Green Bond UCITS ETF (XGBE GY) and Xtrackers USD Corporate Green Bond UCITS ETF (XGBU GY) – providing investors with access to the rapidly growing market for green corporate bonds.
DWS has listed a pair of corporate green bond ETFs on Xetra.
Until now, the UCITS green bond ETF space has been dominated by products targeting the broad green bond market, resulting in substantial allocations to sovereign and supranational debt.
The new ETFs from DWS, by contrast, specifically target the corporate segment of the green bond market.
Listed on Deutsche Bӧrse, the funds track newly developed indices from Bloomberg that use MSCI ESG Research data to assess the credentials of eligible debt based on green bond principles criteria.
The indices are the Bloomberg Barclays MSCI EUR Corporate and Agency Green Bond Index, reflecting euro-denominated bonds, and the Bloomberg Barclays MSCI USD Corporate and Agency Green Bond Index, reflecting US dollar-denominated bonds.
The indices are composed of investment-grade bonds with debt outstanding of at least €300m or $300m market value respectively and which have been issued by a corporate entity. Bonds are weighted by debt outstanding subject to an issuer weight cap of 5%.
To qualify for inclusion in the indices, bonds should meet the eligibility criteria as articulated in the green bond principles endorsed by the International Capital Market Association in 2014. These principles stipulate commitments on the use of proceeds, which must be linked to alternative energy, energy efficiency, pollution prevention and control, sustainable water, green buildings, or climate adaption; on processes pertaining to green project evaluation and selection; on the management of proceeds, including a defined mechanism to ring-fence the net proceeds, and to the ongoing reporting of the environmental performance of the use of proceeds.
Certain green bonds issued prior to 2014 that are widely accepted by investors as green bonds may still qualify for inclusion in the indices even if all principles are not satisfied. Such acceptance is assessed by MSCI ESG Research and includes, at a minimum, conformity with the 2014 green bond principles on stated use of proceeds.
Eligible issuers must also satisfy certain minimum-threshold environmental, social and governance (ESG) criteria with bonds issued by corporations associated with the production of civilian weapons, nuclear weapons, thermal coal, oil sands, and tobacco excluded from consideration along with issuers caught up in ESG-related controversies.
The indices have been designed to meet the Article 9 classification under the European Union’s Sustainable Finance Disclosure Regulation, which means the new ETFs qualify as funds that specifically have sustainability as their investment objective.
The funds track the indices using physical, optimised sampling replication approaches.
The USD fund is naturally tilted towards issuers domiciled in the US which presently make up 56.1% of the fund by weight. Issuers from the Netherlands (8.2%), Hong Kong (7.1%), South Korea (5.1%) and Japan (3.0%) also have material exposure. The fund has a yield to maturity of 1.72% and an effective duration of 6.47.
The EUR fund is tilted towards issuers domiciled in continental Europe. Notable country exposures include France (27.7%), the Netherlands (16.1%), Spain (11.3%), Italy (8.2%) and Germany (7.7%). It has a yield to maturity of 0.37% and an effective duration of 6.67.
Commenting on the launch, Michael Mohr, DWS Head of Passive Product Development, said: “Green bond issuance is booming, but most green bond indices are biased towards sovereign and supranational debt. The new Xtrackers US dollar and EUR green bond ETFs have been constructed to provide investors with exposure to the corporate and corporate-related agency bond segment of this rapidly developing market. This provides corporate bond investors with a compelling alternative to traditional and ESG offerings.”
The funds have been developed in collaboration with Luxembourg-headquartered private bank Quintet, which has provided the funds with inaugural seed capital and has committed to deploying them within its discretionary portfolios.
James Purcell, Group Head of Sustainable Investment at Quintet, said: “We are committed to making sustainability the default approach for all our clients. That includes working with a globally leading group like DWS to provide innovative products that meet client needs and help address the urgent climate challenge.”
An EUR-hedged share class (XGUE GY) of the USD fund has also been listed.
The ETFs come with annual all-in fees (total expense ratios) of 0.25%.