European fixed income ETF provider Tabula Investment Management has cross-listed its highly successful Asia ex-Japan high-yield corporate bond ETF on Deutsche Börse Xetra.

Michael John Lytle, CEO of Tabula Investment Management.

The Tabula Haitong Asia ex-Japan High Yield Corporate USD Bond ESG UCITS ETF is available on Xetra through a euro-hedged share class under the ticker TAEH GY.

The ETF was first launched on London Stock Exchange in US dollars (TAHY LN) in early September and has already reached over $100 million in assets.

The new euro-hedged listing comes with an expense ratio of 0.65%, while the original LSE share class costs 0.60%.

Michael John Lytle, CEO of Tabula Investment Management, said: “The reception from institutional investors in the first two months of trading shows there is significant demand for this asset class. By offering a EUR-hedged listing on Xetra, European ETF investors can now access the Asian USD high yield corporate bond market efficiently and make far more granular asset allocation decisions.”

Methodology

The fund is linked to the iBoxx MSCI ESG USD Asia ex-Japan High Yield Capped Index, an index developed by Tabula in collaboration with Hong Kong-based investment bank Haitong International and index provider IHS Markit while utilizing ESG data from MSCI ESG Research.

The index is based upon the parent iBoxx Asia ex-Japan USD Corporates High Yield Index which covers a universe of non-investment-grade, US dollar-denominated corporate debt from issuers that have more than $400m notional outstanding and are domiciled in Cambodia, China, Hong Kong, India, Indonesia, Macao, Mongolia, Philippines, Singapore, South Korea, Thailand, or Vietnam.

Eligible bonds must have a known cash flow (including fixed-rate, zero-coupon, callable, putable, step-up, amortizing, and perpetual securities), a remaining maturity greater than one year, and a minimum issue size of $250 million.

The methodology implements several environmental, social and governance-related screens that remove issuers in violation of UN Global Compact principles, those with any operations linked to civilian firearms, controversial weapons, nuclear weapons, tobacco, or recreational cannabis, and those that derive significant revenue from alcohol, adult entertainment, conventional weapons, gambling, GMO’s, nuclear power, or thermal coal.

Using insights from MSCI ESG Research, the remaining issuers are then assigned ESG scores based on the most relevant ESG factors by industry and risk exposure. The ESG scores are based on a seven-point scale between AAA and CCC.

Constituents are initially weighted by market value outstanding which is then adjusted to increase exposure to issuers with higher ESG ratings and positive ESG momentum and, similarly, reduce exposure to issuers with lower ESG ratings and negative ESG momentum. Positive (negative) ESG momentum is defined as a firm’s ESG score having improved (deteriorated) over the previous 12 months.

Specifically, issuers’ market value weights are first adjusted by an ESG rating factor corresponding to the following ESG scores: AAA (x1.75), AA (x1.5), A (x1.25), BBB (x1), BB (x1/1.25), B (x1/1.5), and CCC (x1/1.75). Secondly, the weight of issuers with positive ESG momentum is increased by a factor of 2, while those with negative ESG momentum are decreased by 50%. The above weighting methodology also accounts for issuer and sector caps of 3% and 50%, respectively.

Lytle added: “While the opportunity in Asian high yield is clear, there are also some challenges to address. With high yield issuers, there can be greater concerns about ESG, particularly governance, and liquidity is also a consideration. Local expertise can significantly improve trading efficiency. Working in partnership with Haitong International, leveraging their considerable experience and on-the-ground presence in the region, as well as IHS Markit, we have been able to address these opportunities.”

As of the end of October, the index contained 188 bonds from 82 issuers. Chinese issuers dominated with a combined weight of 56.6% followed by firms from India (21.4%), Indonesia (8.5%), and Hong Kong (7.2%). The real estate sector was approaching the 50% cap while the next-largest sector exposures were financials (24.5%), energy (12.7%), and industrials (10.6%). Nearly three-quarters (72.3%) of the index was allocated to bonds rated BB with the majority of the remaining exposure in bonds rated B.

The index was exhibiting a yield of 13.6% with a duration of 2.7 years.

Frederick Chu, Head of ETF Business at Haitong International, said: “Asian credit is now a trillion-dollar asset class – and China the world’s second-largest bond market – but many European investors are significantly underweight. The new listing on Xetra shows our collective commitment to European investors. The ETF provides straightforward access to the USD segment of Asia’s high yield market, while also addressing ESG and liquidity challenges.”