Invesco has introduced a multi-currency, ESG-tailored high yield corporate bond ETF in Europe as part of what the firm says will be a renewed push into the socially responsible fixed income space.
Invesco expects to see significant investor demand for ESG-focused corporate bond ETFs this year.
The asset manager notes that flows into fixed income and ESG products were two stand-out themes in the ETF market in 2022. Bond funds captured nearly 40% of all ETF net new assets during the year, while ETFs incorporating ESG considerations gathered two-thirds of overall market flows.
Invesco believes both themes could continue into 2023 but with potentially greater demand for corporate bond exposures rather than the government bonds that dominated flows in 2022.
Paul Syms, Head of EMEA Fixed Income ETF Product Management at Invesco, said: “Demand for fixed income ETFs has grown substantially in recent years, partly the result of greater understanding from investors but also because of the availability of new products. We believe the pick-up in corporate bond flows seen towards the end of the year could continue in 2023 as a change in the Fed’s focus away from fighting inflation and towards stimulating growth may support credit and high yield.”
Gary Buxton, Head of EMEA ETFs and Indexed Strategies at Invesco, added: “It’s clear from market data that investors are increasingly choosing ETFs for the fixed income components of their portfolios. Investor demand has driven Invesco’s product development, leading to our expanded range of fixed income ETFs with low-cost core exposures alongside those that provide access to more innovative segments of the market. This latest fund launch is our 26th fixed income ETF, representing just over 20% of our ETFs in Europe.”
The newest addition to Invesco’s line-up is the Invesco Global High Yield Corporate Bond ESG UCITS ETF which has come to market with $20 million in initial assets.
The fund has been listed on London Stock Exchange in US dollars (GBHY LN) and pound sterling (GBHS LN) and is also available with GBP-hedging (GBHG LN).
The ETF is linked to the Bloomberg MSCI Global High Yield Liquid Corporate ESG Weighted SRI Bond Index which incorporates both exclusionary filters and tilting to overweight issuers with robust ESG profiles. It follows a similar methodology to Invesco’s investment-grade corporate bond ESG ETFs but with a focus on global high yield.
The index is constructed from the parent Bloomberg Global High Yield Liquid Corporate Bond Index which measures the performance of sub-investment-grade, fixed-rate corporate bonds from issuers domiciled in both developed and emerging markets.
Eligible denominations include US dollars, euros, and pound sterling. To be included in the index, a security must have a minimum par amount of $500 million, €400m, or £300m and have a remaining time to maturity greater than one year.
The construction methodology first excludes issuers that have faced severe ESG-related controversies (including UN Global Compact violations) over the past three years, as well as issuers with business operations linked to alcohol, adult entertainment, controversial weapons, conventional weapons, genetically modified organisms, nuclear power, oil sands, thermal coal, or tobacco.
The remaining issuers are then assigned ESG ratings, based on MSCI‘s seven-point scale from CCC to AAA, which reflect a company’s performance relative to sector peers across a broad range of ESG metrics. Firms with ESG ratings below BB (lower-average) are excluded.
The ESG ratings are also used to re-weight the remaining securities while capping any single issuer at 5%. Specifically, any issuer with an ESG rating in the top three categories (AAA, AA, or A) will have their weight from the parent index multiplied by a factor of two. The index is rebalanced on a monthly basis.
As of 13 January, issuers domiciled in the US accounted for 59% of the index weight with the next-largest country exposures being Italy (9.5%), France (4.3%), Spain (3.4%), and the UK (2.7%).
Approximately two-thirds (66%) of the index was allocated to bonds rated BB, while the majority of the remaining exposure was in bonds rated B (23.6%) and BBB (5.7%). The index is presently yielding 6.89% and has an effective duration of 3.88 years.
The ETF comes with an expense ratio of 0.25% for its non-hedged share classes and 0.30% for its GBP-hedged share class.
While the fund is the first ETF in Europe to provide socially responsible exposure to high yield corporate bonds denominated in multiple major currencies, many ESG-tailored high yield corporate bond ETFs targeting securities denominated in either US dollars or euros are already available.
The largest of these are the $500m iShares $ High Yield Corp Bond ESG UCITS ETF (DHYA LN) and €1.7bn iShares € High Yield Corp Bond ESG UCITS ETF (EHYA LN), both of which are also priced at 0.25%.