Northern Trust Asset Management has rolled out two new FlexShares-branded ETFs in Europe that target the high dividend and low volatility equity factors within emerging markets while also seeking to deliver an enhanced ESG and climate profile.

Marie Dzanis, Head of Northern Trust Asset Management for EMEA.

The funds – the FlexShares Emerging Markets High Dividend Climate ESG UCITS ETF (QDFE) and the FlexShares Emerging Markets Low Volatility Climate ESG UCITS ETF (QVFE) – have been listed on Deutsche Börse Xetra and Euronext Amsterdam in euros.

They come with expense ratios of 0.35% and 0.31% respectively.

The funds complement Northern Trust’s existing European ETF offering which comprises the FlexShares Developed Markets Low Volatility Climate ESG UCITS ETF (QVFD) and the FlexShares Developed Market High Dividend Climate ESG UCITS ETF (QDFD).

These funds, which debuted in March, offer similar ESG-tailored factor strategies as the new listings but target developed market equities.

Marie Dzanis, Head of Northern Trust Asset Management for EMEA, said: “We are proud to expand our ESG product offering in Europe. We believe that investors should be compensated for the risks they take in all market environments. As we see growth opportunities throughout various regions in emerging markets, our newly launched ETFs are designed to capitalize on this growth while leveraging our more than 30 years of sustainable investing expertise.”

Darek Wojnar, Global Head of Funds, ETFs, and Managed Accounts at Northern Trust Asset Management, added: “The addition of QDFE and QVFE will enhance our ETF suite in Europe, providing investors with a diverse set of equity strategies within the growing FlexShares line-up. For the past decade in the US, we’ve defined our place in the ETF industry through our primary focus on meeting specific investor objectives with quantitative solutions. Looking ahead to the next ten years, we recognize the growing importance of sustainability to those objectives and the need for ESG funds that can serve as a core holding across asset classes.”

Index process

The funds are linked to indices developed by Northern Trust in collaboration with Stoxx – namely the iSTOXX Northern Trust Emerging Markets High Dividend Climate ESG Index and the iSTOXX Northern Trust Emerging Markets Low Volatility Climate ESG Index.

The indices are derived from the universe of equities that constitutes the iSTOXX Northern Trust Emerging Markets Index, a benchmark comprising large and mid-cap stocks across emerging markets globally.

Violators of UN Global Compact principles, state-owned entities, and companies involved in tobacco, thermal coal, or weapons production are removed. The high dividend index also removes any firm that is currently not making any distributions to shareholders.

The methodology then assigns quality scores to each company based on Northern Trust’s proprietary analysis of profitability, management expertise, and cash flow. Quality scores range from one to five with companies assigned to the lowest rank excluded.

The remaining companies are weighted according to a portfolio optimization process that seeks to enhance exposure to either the high dividend or low volatility factor, depending on the index, while simultaneously boosting the portfolio’s ESG profile, lowering its carbon intensity, and limiting deviations in region, country, sector, and constituent weights relative to the parent universe.

Specifically, the indices achieve at least a 20% boost in ESG score, a 50% reduction in carbon intensity, and a 20% improvement in carbon risk rating. The indices’ active weights for regions, countries, sectors, and constituents are capped at just one or two percent.

While adhering to the above constraints, the low volatility index minimizes its total variance, while the high dividend index maximizes its quality score and achieves an increase in dividend yield relative to the parent universe of at least 75%.

The indices are reconstituted and rebalanced on a quarterly basis.