WisdomTree has unveiled a pair of smart beta fixed income ETFs on Xetra. The new funds seek to provide enhanced yields compared to similar core European investment-grade bond and treasury benchmarks, while limiting tracking error and risk.
Rafi Aviav, WisdomTree head of product development in Europe.
The funds are the WisdomTree EUR Aggregate Bond Enhanced Yield UCITS ETF and the WisdomTree EUR Government Bond Enhanced Yield UCITS ETF.
Rafi Aviav, WisdomTree head of product development in Europe, said, “The new ETFs launched today are an important addition to the European fixed income fund landscape. The strategy employed by both funds offers a unique solution for investors to potentially increase the yield they’re getting from the market while tightly controlling risk.
“By tilting towards yield the strategy aims to deliver on one of the most important attributes for fixed income investors, while avoiding excessive tracking error and risk-taking with respect to the benchmark.”
Aggregate Bond
The WisdomTree EUR Aggregate Bond Enhanced Yield UCITS ETF tracks the Bloomberg Barclays Euro Aggregate Enhanced Yield Bond Index. It aims to achieve both a higher yield and a low tracking error with respect to its parent universe, the Bloomberg Barclays Euro Aggregate Bond Index, which reflects the performance of the investment-grade, euro-denominated, fixed rate bond market, including treasuries, government-rated, corporate and securitized bonds.
The index does this by following a rules-based approach which tilts the weights of the parent index towards higher yielding segments of the market while controlling risk and tracking error. The methodology contains a three-step process for yield optimisation:
Firstly, index constituents are divided into buckets across sector, country, maturity and credit quality.
Secondly, to control risk and concentration while limiting turnover, a number of constraints are added. These include tracking error (less than 0.35% per month compared to the parent index), duration (no more than one year greater than the parent), sector (no more than 20% from the sector weight of the parent), and portfolio turnover (capped at 5% per month).
Lastly, the index uses an optimization process to reallocate weights across the buckets to maximise yield while adhering to the constraints. Rebalancing occurs on a monthly schedule.
The ETF has been listed with two share classes, one that distributes income to investors (Ticker: WTDP GR) and one that accumulates income (Ticker: WTDQ GR). Both share classes trade in euros. The fund has a total expense ratio (TER) of 0.18%.
Government Bond
The WisdomTree EUR Government Bond Enhanced Yield UCITS ETF tracks the Bloomberg Barclays Euro Treasury Enhanced Yield Bond Index. The index follows a similar methodology as its aggregate bond counterpart and aims to achieve both a higher yield and a low tracking error with respect to its parent index, the Bloomberg Barclays Euro Treasury Bond Index, a reference for investment grade, euro-denominated, fixed rate government bonds issued by the eurozone sovereigns.
The main difference is the buckets into which the constituents of the government bond index are assigned. These buckets include country, which cannot deviate by more than 20% from the country weight in the parent index, and maturity.
The fund’s TER is 0.16%. Similar to the aggregate bond fund, the ETF has also been listed with two share classes. The distributing share class trades under the ticker WTDR GR, while the accumulating share class can be found under WTDS GR.
Smart beta approach
Christopher Gannatti, WisdomTree head of research in Europe, said, “Many fixed income investors today are faced with two broad options: actively managed strategies or exchange-traded products that track market capitalisation-weighted indices. However, this often leads to investors lending more capital to the issuers that already hold the most debt.
“Here we take a ‘smart beta’ approach to fixed income. We have taken two existing universes of fixed income securities and applied an algorithmic approach to try to “squeeze” as much extra income out of these constituents as possible while remaining sensitive to tracking error constraints, bringing the potential for alpha.”
WisdomTree recently launched the WisdomTree AT1 CoCo Bond UCITS ETF (CCBO LN), the world’s first ETF to provide targeted exposure to the Additional Tier 1 bond market. It was also WisdomTree’s the first fixed income ETF in Europe.