Invesco has launched a new fixed income ETF providing socially responsible exposure to the US dollar high-yield corporate bond market.

Gary Buxton, Head of EMEA ETFs and Indexed Strategies at Invesco.

The Invesco USD High Yield Corporate Bond ESG UCITS ETF has listed on London Stock Exchange in US dollars (UHYD LN) and pound sterling (UHYP LN).

It is referenced to the Bloomberg Barclays MSCI USD High Yield Liquid Corporate ESG Weighted SRI Bond Index which is derived from the Bloomberg USD High-Yield Corporate Bond Index.

The parent index consists of non-investment-grade fixed-rate USD-denominated corporate bonds with minimum par amounts of $500 million and remaining maturities greater than one year. Emerging market debt is excluded.

The index construction methodology first excludes issuers that have faced severe ESG-related controversies (including UN Global Compact violations) over the past three years, as well as issuers with business operations linked to alcohol, adult entertainment, controversial weapons, conventional weapons, genetically modified organisms, nuclear power, oil sands, thermal coal, or tobacco.

The remaining issuers are then assigned ESG ratings, based on MSCI‘s seven-point scale from CCC to AAA, which reflect a company’s performance relative to sector peers across a broad range of ESG metrics. Firms with ESG ratings below BB (lower-average) are excluded.

The ESG ratings are also used to re-weight the remaining securities while capping any single issuer at 5%. Specifically, any issuer with an ESG rating in the top three categories (AAA, AA, or A) will have their weight from the parent index multiplied by a factor of two.

Approximately two-thirds (64.7%) of the index is allocated to bonds rated Ba, while the majority of the remaining exposure is in bonds rated B (28.1%) or Caa (7.0%). The index is presently yielding 4.08% and has an effective duration of 4.42 years.

The fund comes with an expense ratio of 0.25%. Distributions will be made to investors on a quarterly basis.

Gary Buxton, Head of EMEA ETFs and Indexed Strategies at Invesco, said: “We believe investors, the environment, and society as a whole should all have the opportunity to benefit from the growth of opportunities to invest more responsibly. ETFs offer investors even greater choice to express their principles while meeting financial objectives, not only in their equity allocation but increasingly other asset classes, especially fixed income. We expect this trend to continue over the coming months and years.”

Paul Syms, Head of EMEA ETF Fixed Income Product Management at Invesco, added: “If we start out looking at the broad asset class, we see the current environment could favour taking credit risk over duration for income investors wanting a pick-up in yield, particularly if inflation continues raising the prospects of Fed rate hikes. Strong economic recovery would also typically support risk assets such as high yield. The next consideration is on sustainability and the picture being painted by investor flows is vivid. In the first six months of the year, 73% of net flows into fixed income ETFs were into funds incorporating ESG filters.”

From a fund selection perspective, the fund is likely to line up against the iShares USD High Yield Corp Bond ESG UCITS ETF (DHYA LN), a similarly positioned ESG-screened bond fund targeting the USD corporate high-yield sector from BlackRock. Launched in November 2019, this fund tracks the Bloomberg Barclays MSCI USD Corporate High Yield Sustainable BB+ SRI Bond Index and houses $660m in assets. Its expense ratio is 0.50%.