Invesco has launched two new actively managed ETFs in Europe providing exposure to euro-denominated corporate bonds that satisfy ESG criteria and have been selected using a multi-factor approach.

Invesco has launched two ESG-conscious smart beta corporate bond ETFs.

The Invesco EUR Corporate Bond ESG Multi-Factor UCITS ETF (Acc: ECMA GY; Dist: ECMF GY) covers bonds from across all maturities, while the Invesco EUR Corporate Bond ESG Short Duration Multi-Factor UCITS ETF (Acc: ECMS GY) targets bonds at the front end of the yield curve.

ECMA and ECMS have been listed on Deutsche Börse Xetra in euros with expense ratios of 0.19% and 0.15%, respectively.

ECMA, the broad maturity ETF, is benchmarked against the Bloomberg Euro Corporate Bond Index which consists of fixed-rate euro-denominated corporate bonds from global issuers with investment-grade credit ratings. Eligible issues must have at least €300 million par outstanding.

ECMS, the short-maturity ETF, meanwhile, is benchmarked against the Bloomberg Euro Corporate Bond 1-5 Year Index which has the same eligibility requirements but consists solely of bonds with remaining maturities between one and five years.

Each ETF may invest up to 30% of its assets in unsecured corporate bonds denominated in currencies other than the euro with the currency risk hedged back to euros at Invesco’s discretion.

Securities are selected for each ETF based on their compliance with ESG criteria as well as their attractiveness according to Invesco’s quantitative investment model.

Violators of international norms as well as companies involved in nuclear power, coal, oil & gas, controversial weapons, military weapons, civilian firearms, tobacco, stem cell research, and genetic engineering will be ineligible for selection.

Due to the socially responsible screening, each ETF is classified as an Article 8 product under the European Union’s Sustainable Finance Disclosure Regulation (SFDR).

Using proprietary models developed by the Invesco Quantitative Strategies (IQS) team, each ETF then creates three individual factor portfolios with bonds that have been selected and weighted to favour issuers with higher exposure to value, low volatility, and carry factor risk premia. These three factor portfolios are then combined to create a multi-factor portfolio with equal risk contribution by each individual factor.

Invesco then evaluates each multi-factor portfolio against its initial universe, limiting deviations in country weights to 8%, sector weights to 5%, issuer weights to 3%, and weighted average duration to 0.2 years.

Paul Syms, Head of EMEA Fixed Income ETF Product Management at Invesco: “Fixed income has become much more interesting this year. Yields on European credit are at the highest levels we’ve seen in a decade due to a combination of higher interest rate expectations and wider spreads over government bonds. Fixed income investors have more to consider now than in recent years, especially if they have sustainability as well as financial objectives. Our newest ETFs allow investors to position their portfolio to reflect their own economic views, either investing across the full maturity curve if they believe yields are close to peaking or focusing on short maturity if they are concerned interest rates could rise further than is currently being priced into the market.”

Erhard Radatz, Senior Portfolio Manager, Invesco Quantitative Strategies: “Introducing ESG principles into a corporate bond portfolio typically means sacrificing yield relative to a standard non-ESG benchmark. That is due partly to the exclusion of traditionally higher-yielding segments and because issuers that are reducing their ESG-related risks tend to be higher quality and, therefore, offer lower yields. You could address the yield shortfall by overweighting issuers with lower credit ratings, but that may not be in investors’ best interest. Instead, we use a factors-based approach to re-establish characteristics such as duration and credit risks so that the ESG portfolio is more aligned with the standard benchmark.”

Gary Buxton, Head of EMEA ETFs and Indexed Strategies at Invesco: “Most ETFs you’ll find in the market are passive, but we recognize an active or quantitative approach may deliver a potentially better outcome in certain situations. By ‘better’ I mean more aligned with the investor’s objectives and risk-return expectations. That’s why we adopt an unbiased approach to product development with decisions ultimately driven by investor demand and market dynamics. Where appropriate, we can leverage expertise within Invesco’s global resources, such as our IQS team’s more than 30 years’ incorporating factor-based investing and ESG into client portfolios.”