WisdomTree has launched the world’s first ETF to provide exposure to bonds directly issued by the European Union.
Lidia Treiber, Director, Research, WisdomTree.
The WisdomTree European Union Bond UCITS ETF has listed in euros on Deutsche Börse and Borsa Italiana under the tickers W1TG GY and EUBO IM, respectively.
The fund comes to market with €15 million in assets.
Alexis Marinof, Head of Europe, WisdomTree, commented: “ETFs provide a cost-efficient way to access fixed income strategies and are becoming the vehicle of choice for many fixed income investors.
“The WisdomTree European Union Bond UCITS ETF reflects our approach to product development and providing investors with unique exposures, whether that is by being first to market or developing differentiated strategies.
“By leveraging our heritage of innovation, we continue to build products which help European investors allocate to fixed income asset classes that have historically been inaccessible through the ETF wrapper, something we have done in AT1 CoCos, US Treasury floating rate notes, and now EU bonds.”
The fund is designed to provide exposure exclusively to EU bonds that have been issued to finance the SURE and NextGenerationEU programmes – initiatives that are aimed at mitigating EU member state unemployment risks and repairing the immediate economic and social damage caused by the Covid-19 pandemic.
The idea of government bonds jointly issued by the EU’s member states was first floated during the 2009–2012 European sovereign debt crisis as a means for indebted states to borrow at better conditions as they would be supported by the superior credit ratings of non-crisis states.
While the proposal was generally favoured by indebted governments such as Portugal, Greece, and Ireland, it encountered strong opposition from Germany and the Netherlands which argued that such an arrangement would suffer from the free rider problem.
The idea was again proposed in 2020 as a potential response to the impacts of the Covid-19 pandemic, leading such debt issue to be dubbed “corona bonds”. The European Commission put forward two new programmes with a total envelope of €850 billion to be funded by EU bonds.
The SURE (Support to mitigate Unemployment Risks in an Emergency) program, which was approved in May 2020, will provide total loans to member states of up to €100bn for the support of short-time work schemes and similar measures. EU SURE bonds fall under the social bond framework as member states are required to regularly report on how the funds are being spent.
The NextGenerationEU initiative, meanwhile, has an envelope of €750bn which will be distributed between 2021 and 2023 through grants and long-term loans to member states. A portion of NextGenerationEU bonds could also fall under social or green bond frameworks as the initiative’s goal, according to the European Commission, is “to make Europe greener, more digital, more resilient, and a better fit for the current and forthcoming challenges”. The initiative is currently awaiting ratification by member states.
The expected bond issuance of €850bn will position the EU as the second-largest AAA-rated issuer in Europe.
Lidia Treiber, Director, Research at WisdomTree, commented: “The Covid-19 crisis has led to Europe unifying on several fronts to tackle the virus and stimulate an economic recovery. EU bonds could add another highly rated and liquid instrument with the capacity to become a larger share of the European Central Bank’s asset purchasing programmes.
“EU bonds benefit from a strong credit rating and can help investors reduce the credit risk across portfolios while benefiting from a yield pick-up relative to German sovereign bonds. While the supply of EU bonds will rise, demand has been exceptionally high with primary issuance to date oversubscribed, owing to the EU being a high-quality issuer and an environmental, social, and governance (ESG) component attached to bonds issued under the SURE programme. We expect this trend of high demand to continue once the NextGenerationEU initiative rolls out.”
Methodology
The fund tracks the iBoxx EUR European Union Select Index using direct physical replication. The index consists of euro-denominated, fixed-rate bonds issued by the EU to finance the SURE and NextGenerationEU programmes. Eligible bonds must have a minimum amount outstanding of €1bn and a remaining time to maturity greater than one year. Constituents are weighted by market value, and the index is rebalanced on a monthly basis.
Index provider IHS Markit notes that the index may be updated at a future date to reflect developments in the EU’s borrowing activities – such as increases in EU funding volumes as well as the introduction of new eligible programmes.
The ETF comes with an expense ratio of 0.16%. Income is accumulated within the portfolio.