Deutsche Asset & Wealth Management (Deutsche AWM), the asset manager behind the db x-trackers range of exchange-traded funds, has launched a quality-weighted eurozone sovereign bond ETF, marking its entry into the fixed income smart beta market.

The first smart beta bond ETF from Deutsche AWM weights constituents by their quality as opposed to their level of indebtedness.

The db x-trackers iBoxx Eurozone Sovereigns Quality Weighted UCITS ETF (XESQ) provides exposure to an index of eurozone sovereign bonds that have been weighted based on criteria that focus on providing higher exposure to better quality issuers. This is different to traditional fixed income sovereign benchmarks, which typically weight constituents by issuance volume, hence providing the highest weighted exposure to the most indebted countries.

ETFs following smart beta strategies are becoming more common within equity-based offerings, but there are few fixed income ETFs on the European market. This smart beta approach aims to maintain the initial benchmark diversification but with less concentration on fundamentally weak countries.

“The aim of this ETF is to provide a straightforward method of acquiring quality-focused sovereign bond exposure, and to provide investors with the potential for an improved risk versus return profile,” said Martin Weithofer, Deutsche AWM’s head of strategic beta. “The quality weighted index provides similar returns to the traditional index but with potentially lower volatility and a smaller maximum peak-to-trough decline.”

The ETF tracks the Markit iBoxx EUR Eurozone Sovereigns Quality Weighted Index. Eligible bonds are selected in accordance with a quality methodology that underpins the index which sets out to assess the fundamental strength of an eligible country. This involves grading sovereign issuers based on a series of fundamental measures, such as unemployment and inflation rates, history of default, sovereign debt as a proportion of GDP and GDP growth rate.

Country weights within the index are determined according to their fundamental quality. Countries that are currently over-weighted in the quality benchmark – relative to the traditional non-weighted sovereign index – include Germany and the Netherlands. Countries that are currently relatively under-weighted in the quality benchmark include Italy and Spain.

The ETF is listed on the Deutsche Börse and has an annual all-in fee of 0.20%.