Fidelity International has launched two new active fixed income ETFs in Europe providing climate-conscious exposure to corporate bonds that have been selected using a multi-factor investment approach.

Stefan Kuhn, Head of ETF Distribution, Europe, at Fidelity International.

The Fidelity Sustainable EUR Corporate Bond Paris Aligned Multifactor UCITS ETF (FEIG) and Fidelity Sustainable USD Corporate Bond Paris Aligned Multifactor UCITS ETF (FUIG) have made their debut on London Stock Exchange and Deutsche Börse Xetra.

Additional listings on SIX Swiss Exchange and Borsa Italiana are expected in the near future.

Investment approach

Each ETF comprises fixed-rate, investment-grade-rated corporate bonds. FEIG targets euro-denominated bonds, while FUIG focuses on those denominated in US dollars.

The security selection methodology for each ETF is influenced by Fidelity’s in-house multi-factor credit model, which is integrated with sustainability benchmarks. Crafted by the firm’s systematic fixed income specialists, this model aims to pinpoint bond issuers likely to offer higher idiosyncratic returns.

Initially, the quantitative procedure evaluates a range of factors, including sentiment, valuation, fundamentals, and ESG metrics, to arrive at a comprehensive multi-factor score for each bond issuer. The goal is to produce alpha by choosing the most favorable bonds, after considering transaction costs and valuation measures, from issuers that score highly on the multi-factor scale.

Moreover, the ETFs incorporate additional ESG screening procedures and employ an optimization weighting strategy to align with the European Union’s Paris-Aligned Benchmark (PAB) guidelines. Specifically, issuers involved in significant ESG controversies, in violation of international norms, negatively impacting UN Sustainable Development Goals, or associated with sectors like weapons, tobacco, thermal coal, and oil & gas, are excluded from consideration.

The issuers that remain are weighted to immediately achieve a 50% reduction in weighted average carbon intensity relative to the initial universes. Additionally, the strategy mandates a further 7% annual decarbonization, positioning the portfolios on a pathway to restrict global temperature rise to 1.5°C by the year 2050.

Each ETF comes with an expense ratio of 0.20%. Currency-hedged share classes are also available at a fee of 0.25%.

These new offerings complement similar strategies delivered through the $570 million Fidelity Sustainable Global Corporate Bond Paris-Aligned Multifactor UCITS ETF (FSMF) and $320m Fidelity Sustainable Global High Yield Bond Paris-Aligned Multifactor UCITS ETF (FHYP). FSMF targets investment-grade corporate bonds denominated in multiple currencies and issued from issuers located worldwide, while FHYP targets high yield corporate bonds. FSMF and FHYP come with expense ratios of 0.25% and 0.35%, respectively.

All four ETFs are classified as Article 9 products under the European Union’s Sustainable Finance Disclosure Regulation (SFDR).

Stefan Kuhn, Head of ETF Distribution, Europe, at Fidelity International, commented: “ETFs are growing in popularity as investors hunt for alternative vehicles that can deliver alpha. Indeed, the ETF market has grown from around $200bn globally in 2003 to more than $9.5trn in 2022 and is expected to reach $15trn in just five years. Since launching in 2021, our Sustainable Global Corporate Bond Multifactor UCITS ETF has been well-received by clients, leveraging Fidelity’s active research capabilities and our expertise in sustainability to identify top-tier corporate bonds at a competitive price point. We are pleased to extend this successful strategy to include regional variations, as per client demand.”