Lyxor has launched three new fixed income ETFs providing exposure to US dollar-denominated, euro-denominated, and global high-yield corporate bond markets while incorporating sustainability criteria.
Philippe Baché, Head of Fixed Income at Lyxor ETF.
The funds are based on Bloomberg Barclays MSCI Sustainable SRI Indices and using a synthetic (or swap-based) replication approach.
The indices harness Bloomberg’s expertise in fixed income indexing while leveraging research from MSCI to exclude issuers in controversial industries as well as those with low environmental, social, and governance (ESG) ratings.
The USD and global funds have listed in US dollars on London Stock Exchange and will also be available, additionally with the EUR-focused fund, in euros on Borsa Italiana on 25 February 2020.
The funds
The Lyxor USD High Yield Sustainable Exposure UCITS ETF (UHYS LN, UHYS IM) is linked to the Bloomberg Barclays MSCI US Corporate High Yield SRI Sustainable Index, which includes US dollar-denominated high-yield bonds from issuers in developed market countries.
The Lyxor Euro High Yield Sustainable Exposure UCITS ETF (EHYS IM) is linked to the Bloomberg Barclays MSCI Euro Corporate High Yield SRI Sustainable Index, which includes euro-denominated high yield bonds from issuers in developed market countries.
Finally, the Lyxor Global High Yield Sustainable Exposure UCITS ETF (GHYE LN, GHYU IM) is linked to the Bloomberg Barclays MSCI Global Corporate High Yield SRI Sustainable Index which incorporates the US dollar and euro high-yield universes as well as high-yield bonds issued in hard currencies from emerging market corporate issuers.
Each index first screens out issuers embroiled in severe ESG-related controversies as well as those with substantial revenue derived from adult entertainment, alcohol, gambling, tobacco, controversial and military weapons, civilian firearms, nuclear power, and genetically modified organisms.
The remaining issuers are then assigned ESG ratings using in-house analytics from MSCI, with the index provider using a seven-point scale from ‘AAA’ to ‘CCC’ based on how the company manages key issues relative to industry peers. A minimum MSCI ESG rating of BBB is required to be included in the indices.
Constituents are weighted by market value outstanding, and the indices are rebalanced on a monthly basis.
Each fund comes with an expense ratio of 0.25%, the lowest-cost among Europe-listed ETFs tracking high-yield indices with ESG filters. Income is accumulated within the portfolios.
ESG fixed income ETFs are benefitting from growing demand as investors increasingly aim to align their portfolios with socially responsible goals. According to data from Bloomberg, these funds represented 2.2% of the European fixed income ETF universe in 2019 but gathered 6.9% (€3.7bn) of the region’s total net inflows into bond ETFs.
To further capture this trend, Lyxor made the decision in 2019 to move the bulk of its investment-grade bond ETFs to Bloomberg Barclays MSCI Sustainable SRI Indices using the same ESG rating methodology.
Philippe Baché, Head of Fixed Income at Lyxor ETF, commented, “ESG rating in high yield is one of the latest innovations in fixed income indexing. We are always looking for ways to provide investors with even more innovative tools to achieve their sustainable goals. By applying an ESG lens to the high yield bond universe, we are able to provide a significant move away from parent indices offering a potentially more conservative risk profile.”
Sanjay Rao, Product Manager, Bloomberg Barclays Indices Europe, added, “We are delighted that the latest addition to our suite of fixed income indices, the Bloomberg Barclays MSCI HY SRI Indices, have been selected by Lyxor ETF for their new high yield bond ETFs. Since the Bloomberg Barclays MSCI ESG fixed income investment grade indices were launched in 2013, ESG investing has continued to grow and we will continue to evolve our offering to provide investors with a broad portfolio of ESG index solutions.”