LGIM introduces five fixed income ETFs linked to JP Morgan indices

Dec 11th, 2020 | By | Category: Fixed Income

Legal & General Investment Management (LGIM), the UK’s largest asset manager by AUM, has introduced its first fixed income ETFs in Europe, offering core and ESG-integrated exposures.

LGIM debuts suite of core ESG-integrated fixed income ETFs

LGIM has returned to the fixed income ETF fold with the launch of five funds offering core and ESG-integrated exposures.

Sticklers for accuracy might argue that the launch technically marks LGIM’s return to the fixed income ETF fold following the closure last year of four fundamentally-weighted bond ETFs it offered in partnership with Lombard Odier Investment Managers – a by-product of its acquisition of ETF Securities‘ Canvas platform.

Either way, the new ETFs are certainly LGIM’s first fixed income ETFs in an independent capacity.

The suite consists of five funds. One provides core exposure to short-term UK government bonds, while the others provide sustainable exposure to short-term and broad-maturity sterling corporates, emerging markets govies, and Chinese government and policy bank bonds.

All five ETFs have listed on the London Stock Exchange, while the emerging markets and China ETFs have additionally been cross-listed on Deutsche Börse Xetra and Borsa Italiana.

The funds are linked to indices developed in partnership with JP Morgan, with the two firms drawing upon their experience in both active and passive fixed income management to structure indices that seek to create value and address liquidity considerations.

This includes leveraging LGIM’s liquidity-aware approach, which uses increased minimum issuance thresholds relative to traditional bond benchmarks as well as optimizations that seek to further enhance portfolio liquidity without sacrificing potential performance.

The indices avoid so-called crowded trades such as the heightened selling activity that typically occurs when a bond is first downgraded into high-yield territory. By holding so-called ‘fallen angels’ for up to six months after their downgrade, the indices may benefit from the price reversion phenomenon that is often recorded in these bonds.

The indices also aim to enhance cash efficiency by reinvesting coupons immediately rather than waiting until the end of the month as is commonly done in traditional bond benchmarks.

On the sustainability front, the indices harness insights from Sustainalytics and RepRisk to allocate greater weights to green bonds and issuers with the strongest ESG scores while maintaining a similar risk and return profile to their traditional value-weighted bond markets.

The methodology also removes UN Global Compact violators, firms with ESG scores lower than 20%, as well as companies operating in certain undesirable industries such as controversial weapons, thermal coal, tobacco, and oil sands.

Howie Li, Head of ETFs at LGIM, commented, “Liquidity and ESG integration in bond investing are among the top considerations for fixed income investors. Our client feedback has been clear that the ETF industry needs to provide fixed income tools that better reflect the forward-looking investment landscape. With LGIM’s deep experience in index and responsible investing, we set out to pro-actively design bond indices that address the liquidity and ESG requirements of modern investors.

“At the same time, we wanted to add the value LGIM has been delivering to its clients for many years through experienced portfolio management of bond indices. In a single transaction, investors can now access the diversified bond portfolios in these ETFs to make strategic and tactical asset allocation decisions that address their ESG needs and liquidity concerns whilst maximizing the potential value of thoughtfully designed indices that incorporates LGIM’s index experience.”

Lee Collins, Head of Index Fixed Income at LGIM, added, “We are excited to partner with JPMorgan on the index design for LGIM’s first fixed income ETFs and to see the many months of dedicated effort come to fruition with the launch of these products. It was important to us that we could incorporate some of our pragmatic portfolio management techniques into the index design itself, thereby allowing us to take full advantage of opportunities to create real value for investors.”

The five ETFs are as follows:

The L&G UK Gilt 0-5 Year UCITS ETF (UKG5 LN) is tradeable in pound sterling. It has been seeded with £5 million and comes with an expense ratio of 0.06%. The fund tracks the JP Morgan GBI UK Short-Term Custom Maturity Index which covers fixed-rate and zero-coupon sterling-denominated UK government bonds maturing within the next three months to five years.

The L&G ESG GBP Corporate Bond UCITS ETF (GBPC LN) also trades pound sterling. It comes to market with £25m in AUM and has an expense ratio of 0.09%. The fund tracks the JP Morgan GCI ESG Investment Grade GBP Custom Maturity Index which includes a broad range of investment-grade corporate securities from issuers globally. Issues must have at least £300m outstanding and a time to maturity of at least six months.

The L&G ESG GBP Corporate Bond 0-5 Year UCITS ETF (GBP5 LN) similarly trades in pound sterling. It comes with £12m in assets and also carries an expense ratio of 0.09%. The fund tracks the JP Morgan GCI ESG Investment Grade GBP Short-Term Custom Maturity Index which is similar to the index described above but only includes bonds with remaining maturities between six months and five years.

The L&G ESG Emerging Markets Government Bond (USD) 0-5 Year UCITS ETF trades on LSE in US dollars (EMD5 LN) and pound sterling (EMDG LN), and on Xetra (EMA5 GY) and Borsa Italiana (EMD5 IM) in euros. The fund comes to market with $30m AUM and has an expense ratio of 0.25%. It tracks the JP Morgan ESG EMBI Global Diversified Short-Term Custom Maturity Index which includes US dollar-denominated fixed and floating-rate debt issued by sovereign and quasi-sovereign entities in emerging markets. Eligible issues must have $500m outstanding and a time to maturity between three months and five years.

The L&G ESG China CNY Bond UCITS ETF trades on LSE in US dollars (DRGN LN) and pound sterling (DRGG LN) as well as on Xetra (DRGN GY) and Borsa Italiana (DRGN IM) in euros. The fund comes to market with $10m AUM and has an expense ratio of 0.25%. It tracks the JP Morgan China Custom Liquid ESG Capped Index which covers fixed-rate, bullet, renminbi-denominated government and policy bank bonds. Securities must be listed on the China interbank market and have a minimum issue size of 50bn renminbi and a time to maturity greater than 2.5 years. Exposure to each of the three policy bank issuers is capped at 19%

All five ETFs distribute income to investors.

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