VanEck has teamed up with credit ratings agency Moody’s to launch two new ETFs providing exposure to corporate bonds with valuations determined to be attractive relative to their expected probability of downgrade.
The ETFs harness insights from Moody’s Analytics to select bonds with attractive valuations relative to their expected probability of being downgraded.
The VanEck Vectors Moody’s Analytics IG Corporate Bond ETF (MIG US) and VanEck Vectors Moody’s Analytics BBB Corporate Bond ETF (MBBB US) have listed on Cboe BZX Exchange and come with expense ratios of 0.20% and 0.25%, respectively.
Distributions are sent to investors on a monthly basis.
The funds track proprietary indices created by VanEck’s indexing division, MV Index Solutions (MVIS), in partnership with Moody’s Analytics, a Moody’s subsidiary that provides financial market intelligence and tools.
Investment grade
MIG is linked to the MVIS Moody’s Analytics US Investment Grade Corporate Bond Index which consists of US dollar-denominated investment-grade corporate bonds issued globally that offer a high excess spread over fair value, based on proprietary credit risk metrics developed by Moody’s Analytics.
Similarly, the index excludes bonds that Moody’s Analytics deems to have a high probability of undergoing a credit rating downgrade.
Eligible bonds must have at least $750m outstanding and a time to maturity that exceeds 18 months. The index is weighted by market value while capping any single issuer at 3% and any sector exposure at 25%. It is currently yielding 2.2% with an effective duration of 6.96 years.
Bonds from the financials sector currently account for over one-third (35.1%) of the index’s weight with the energy (17.8%), communications (13.5%), consumer non-cyclical (10.8%), and technology (7.1%) sectors making up the next largest exposures.
Interestingly, the index tilts considerably towards bonds at the lower end of the investment-grade scale with bonds rated BBB and A making up 73.0% of the total exposure, while bonds rated A, AA, and AAA account for 18.5%, 6.3%, and just 2.2% respectively.
Lower medium grade
MBBB, meanwhile, tracks the MVIS Moody’s Analytics US BBB Corporate Bond Index which utilizes the same investment approach but is based on an initial universe of US dollar-denominated corporate bonds with credit ratings of BBB.
Any single issuer is capped at 5% and sectors at 25%. It is currently yielding 2.4% and has an effective duration of 7.03 years. Financial sector bonds also account for the largest weight at 25.2% followed by energy and communications at 20% each and consumer non-cyclical at 12.9%.
‘Achieving outperformance’
Commenting on the launch, Fran Rodilosso, Head of Fixed Income ETF Portfolio Management at VanEck, said: “The corporate bond universe is expansive and there can be a great deal of dispersion in terms of where the market is pricing risk and a bond’s fair value. Finding bonds with attractive valuations and achieving outperformance is built upon accurately evaluating a bond’s expected credit risk going forward. Incorporating market implied information into the selection process to evaluate credit risk allows you to do that, particularly in volatile markets.”
“We have established a comprehensive set of metrics for early warning detection of credit defaults and downgrades,” said Nihil Patel, Managing Director at Moody’s Analytics. “Our research shows our credit risk metrics can help identify undervalued securities. We are thrilled to be able to offer our credit risk metrics for use in the indices underlying VanEck’s funds.”
“Moody’s Analytics is the recognized industry leader in credit risk modeling so we are excited to be using their credit risk models and data to power these two new funds,” added William Sokol, Senior ETF Product Manager at VanEck. “We believe that these funds can offer investors the income potential and outperformance they are looking for without having to assume excessive risk, which is particularly important in this prolonged low yield environment.”