European fixed income ETF provider Tabula Investment Management has launched Europe’s first ETF providing sustainable exposure to high yield corporate bonds from the Asia ex-Japan region.

Michael John Lytle, CEO of Tabula Investment Management.

The Tabula Haitong Asia ex-Japan HY Corp USD Bond ESG UCITS ETF (TAHY LN) has been listed on London Stock Exchange in US dollars and was brought to market in partnership with Hong Kong-based investment bank Haitong International.

The fund has been seeded with $25 million in assets.

Methodology

The ETF is linked to the iBoxx MSCI ESG USD Asia ex-Japan High Yield Capped Index which was developed by Tabula, Haitong International, and IHS Markit while utilizing ESG data from MSCI.

The index is based upon the parent iBoxx Asia ex-Japan USD Corporates High Yield Index.

The parent index 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 conducts several ESG-related screening processes 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 firms with higher ESG ratings and positive ESG momentum and, similarly, reduce exposure to firms 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.

Chinese issuers dominate the index with a combined weight of 60.3% followed by firms from India (19.7%), Hong Kong (7.9%), and Thailand (2.5%). The real estate sector has reached the 50% cap while the next-largest sector exposures are financials (24.0%), industrials (11.9%), and energy (9.5%). Approximately two-thirds (68.4%) of the index is allocated to bonds rated BB with the majority of the remaining exposure in bonds rated B.

The ETF currently offers a yield of 8.9% with a duration of 2.6 years. Income is accumulated within the portfolio.

The fund comes with an expense ratio of 0.60% and is classified as Article 8 under the European Union’s Sustainable Finance Disclosure Regulation (SFDR).

Michael John Lytle, CEO of Tabula Investment Management, said: “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.

“Until recently, European ETF investors could only access the Asian USD high yield corporate bond market via broad emerging market or global ETFs. Our new ETF supports far more granular asset allocation decisions.”

Frederick Chu, Head of ETF Business at Haitong International, added: “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. As well as yield, this market can provide interesting diversification benefits in a fixed income portfolio since it is often at a different stage in the market cycle. This ETF provides straightforward access to the USD segment of Asia’s high yield market, while also addressing ESG and liquidity challenges.”