IndexIQ has launched the IQ MacKay ESG Core Plus Bond ETF (ESGB US), a new actively managed ETF designed to serve as a core holding within socially responsible fixed income portfolios.
Janelle Woodward, President of MacKay Shields.
Listed on NYSE Arca, the fund is sub-advised by MacKay Shields, a global asset manager and fellow New York Life Investments affiliate which manages more than $40 billion across its fixed income portfolios.
The ETF, which comes to market with $20 million in assets, will be led by Stephen Cianci, Neil Moriarty, Alexandra Wilson-Elizondo, and Joseph Cantwell, all senior portfolio managers within MacKay’s Global Fixed Income team.
The fund seeks a total return by investing in a broad portfolio of fixed and floating-rate government, quasi-government, corporate, mortgage, and asset-backed securities while aiming to maintain a modified duration within 2.5 years of the Bloomberg Barclays US Aggregate Bond Index.
Up to 30% of the portfolio may be invested in securities rated below investment grade, up to 20% in non-US issuers including up to 10% in emerging market issuers, and up to 20% in securities denominated in a currency other than the US dollar.
Eligible securities must pass MacKay Shields’ ESG framework which includes a proprietary assessment of ESG factors as well as standards developed by recognized international organizations such as entities sponsored by the United Nations.
In general, issuers that derive more than 5% of their revenue from coal, military equipment, alcohol, tobacco, gambling, and adult entertainment, as well as those that do not meet the grade on human rights, labour standards, environmental impact, and corruption will be removed from the selection pool.
Mackay Shields then assigns each firm an ESG rating – either ‘outperforming’, ‘average’, or ‘underperforming’ – based on a company’s performance across each of the three ESG pillars relative to industry peers. Eligible portfolio securities must be assigned at least an ‘average’ rating or, if rated as ‘underperforming’, display a clear indication that it is improving its ESG performance.
When selecting individual securities, the portfolio management team combines top-down macroeconomic analysis with fundamental bottom-up research. The process seeks to maintain broad fixed income exposure while enhancing risk-adjusted return by eliminating uncompensated risk.
The ETF comes with a net expense ratio of 0.39% due to a contractual fee waiver in place until at least August 2022. Its gross expense ratio is 0.82%.
Distributions are made to investors on a monthly basis.
Janelle Woodward, President of MacKay Shields, commented: “As adoption and demand for ESG investment strategies grow in the fixed income marketplace, we saw a valuable opportunity to reflect our best thinking around ESG inclusion with ESGB, aligning the breadth of our internal research with our total return investment approach. Through the alignment of ESG values with our stakeholders, in our view, ESGB can serve as a preferred solution for potential income generation and capital appreciation for both retail and institutional investors.”
Sal Bruno, CIO of IndexIQ, added: “With the launch of ESGB, we’re excited to expand our existing ESG ETF lineup by building upon our partnership with MacKay Shields. We believe investors will recognize the potential benefits of working with a proven portfolio management team and investing in a fund that seeks to provide them broad fixed income exposure in the core bond category with an ESG lens that many investors value in their portfolios.”
IndexIQ offers a further two actively managed fixed income ETFs sub-advised by MacKay Shields, both of which are focused on the municipal bond market: the IQ MacKay Muni Insured ETF (MMIN US) has $450m in assets and comes with an expense ratio of 0.31%, while the IQ MacKay Municipal Intermediate ETF (MMIT US) houses $180m and costs 0.30%.