Lyxor Asset Management has converted its EUR and USD investment-grade corporate credit ESG ETFs to physical replication. It has also cut their fees from 0.20% to 0.14% – among the lowest available in the market.

Philippe Baché, Head of Fixed Income ETFs at Lyxor Asset Management.

Lyxor says the lowering of fees and switch away from synthetic replication reflects the firm’s commitment to enhancing its ESG offering to meet the growing demand for sustainable fixed income investments.

The shift away from synthetic replication mirrors industry trends. While swap-based indexing approaches make sense in certain markets and have enjoyed a modest revival recently, direct physical index replication has, on the whole, proved more popular with investors, particularly among retail and intermediary communities.

The ETFs affected by the changes are the Lyxor ESG Euro Corporate Bond (DR) UCITS ETF, the Lyxor ESG USD Corporate Bond (DR) UCITS ETF, and the Lyxor ESG Euro Corporate Bond Ex Financials (DR) UCITS ETF.

The ETFs are referenced to currency-denomination-specific sub-indices belonging to the Bloomberg Barclays MSCI SRI Sustainable Index family. The indices – Bloomberg Barclays MSCI EUR Corporate Liquid SRI Sustainable Index, Bloomberg Barclays MSCI USD Corporate Liquid SRI Sustainable Index, and Bloomberg Barclays MSCI EUR Corporate Liquid ex Financial SRI Sustainable Index respectively – comprise fixed-rate bonds issued by corporate issuers globally.

To be eligible for inclusion, a bond must have a remaining maturity of at least one year and its issuer must have an MSCI ESG rating of at least BBB (broadly akin to average). Issuers that generate 5% or more of their revenues from business activities such as thermal coal, unconventional oil and gas, and arctic oil or gas are excluded. Par amount outstanding criteria also apply.

The funds collectively house just over €1 billion in assets and maintain listings variably on Euronext Paris, Xetra, Borsa Italiana, SIX Swiss Exchange, BX Swiss, and London Stock Exchange. None of the newly physically-backed funds will engage in securities lending.

The trio all previously tracked regular, non-ESG credit indices provided by IHS Markit. Lyxor says further changes of this nature are on the way with other credit ETFs penciled in for a revamp. Lyxor is not alone. A number of issuers, including its Paris-based peer Amundi, have relaunched products in this way in recent months, with pre-existing ETFs being retrofitted with new ESG-aligned mandates.

With demand for sustainable investment strategies growing strongly, the commercial motive for such ESG-inspired reorganizations is clear. Indeed, Lyxor notes that ESG ETF flows in 2020 represented more than half the total year’s cumulative ETF flows, of which fixed income ETFs captured €9.2bn – more than double the assets raised during the whole of 2019.

Philippe Baché, Head of Fixed Income ETFs at Lyxor Asset Management, commented: “Investors are increasingly looking for simple, transparent and competitive fixed income exposures which integrate ESG considerations.

“The changes we’re making to our credit ETFs, now and in the future, allied to our world-leading green bond ETF, are designed to help them build more sustainable fixed income portfolios capable of accelerating the transition to a low carbon economy.”