UBS Asset Management has launched a new fixed income ETF providing exposure to global government bonds whilst taking into account environmental, social, and governance characteristics.
The fund is the second ESG-screened bond ETF created by UBS and JP Morgan.
The UBS ETF – JP Morgan Global Government ESG Liquid Bond UCITS ETF is the first global sovereign debt ETF to incorporate ESG screening.
The fund harnesses the fixed income indexing capabilities of JP Morgan as well as the ESG data capabilities of Sustainalytics and RepRisk.
The underlying JP Morgan Global Government ESG Liquid Bond Index selects its constituents from the parent JP Morgan Global Government Bond Index, a flagship global sovereign debt index covering local currency bonds issued by governments from developed and emerging countries.
The parent index includes fixed-rate and zero-coupon bonds, while floating-rate bonds, capitalization/amortizing bonds, and bonds with callable, puttable, or convertible features are excluded. Eligible issues must have a minimum size of $1 billion and a remaining maturity greater than 13 months.
The ETF’s index begins by excluding countries that make up less than 0.25% of the parent universe. The methodology then applies an ESG scoring and screening process to tilt towards countries ranked higher on ESG criteria, and to underweight or remove those that rank lower.
A country’s ESG score reflects a mix of qualitative and quantitative analysis including values-based screening, such as participation in controversial weapons and thermal coal; norms-based screening, such as evidence of illegal activities, human rights violations, and disregard for UN Global Compact principles; and positive screening, which rewards countries with robust ESG business practices.
Countries are categorzied into ten bands based on their ESG score and the countries in the lowest five ESG bands are removed from the index. The remaining countries are weighted by the market value of their outstanding debt, adjusted to increase exposure to countries with higher ESG scores. The index is reconstituted and rebalanced on a monthly basis.
The resulting index contains risk characteristics that are broadly similar to the parent universe. The largest country exposures are the US at 40.2% (vs. 38.3% for the parent index), followed by Japan (19.7% vs. 18.8%), France (7.4% vs. 7.0%), the UK (6.7% vs. 5.7%), and Germany (5.2% vs. 4.5%).
The index has a yield to maturity of 0.72% and a modified duration of 8.7 years. Relative to the parent universe, the index has exhibited annualized tracking error of 0.09% and annualized outperformance of 0.09% over the past six years (as of 30 August 2019).
The fund has been listed on SIX Swiss Exchange in US dollars (ESGGB SW) and on Xetra in euros (UIQC GR). Further listings on Borsa Italiana and London Stock Exchange are pending, while UBS also plans to roll out currency-hedged versions of the fund. It comes with an expense ratio of 0.15%.
UBS and JP Morgan partnered earlier in the year on another ESG-screened bond ETF – the UBS ETF (LU) JP Morgan USD EM IG ESG Diversified Bond UCITS ETF – which invests in US dollar-denominated emerging market debt rated investment grade. The underlying JP Morgan USD EM IG ESG Diversified Bond Index consists of sovereigns, quasi-sovereigns, and corporates while screening out issuers with poor ESG performance. This fund comes with an expense ratio of 0.45%.