Deutsche AWM launches the world’s first shorter maturity European high-yield corporate bond ETF

Deutsche Asset & Wealth Management has listed a suite of three euro-denominated high-yield corporate bond ETFs, including the world’s first ETF providing exposure to the shorter maturity segment of the market…….

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Arne Noack, Head of Exchange Traded Product Development, EMEA

The db x-trackers II iBoxx EUR High Yield Bond 1-3 UCITS ETF provides exposure to 97 liquid fixed and floating rate sub-investment grade euro-denominated corporate bonds in the one-to-three-year maturity bucket1. The ETF is listed on the Deutsche Börse and has an all-in fee of 0.35% per annum.

Arne Noack, Head of Exchange Traded Product Development, EMEA, commented: “In light of the continued strong demand for high-yield bond ETFs, we have scanned the range of products available in the market and identified certain gaps where we see an opportunity to serve investors. We feel these new products are important additions to the euro high-yield ETF market.”

The yield on the ETF’s underlying index, the Markit iBoxx Liquid EUR High Yield 1-3 Index, stands at 3.96% (as at 07/01/2015).

The other two new launches, also on the Deutsche Börse, provide exposure to euro-denominated high-yield corporate debt encompassing the full yield curve – over 400 securities1 – and daily rebalanced inverse (or short) exposure on the same index (see table below). The yield on the former’s underlying index, the Markit iBoxx EUR Liquid High Yield Index, stands at 4.31% (as at 07/01/2015). The short daily ETF is specifically aimed at professional investors and provides a tool for tactical inverse positioning. “In launching a product linked to the Markit iBoxx EUR Liquid High Yield Index our intention is to bring to market the most competitively priced ETF tracking the overall liquid universe of the euro-denominated high-yield bond market,” added Noack.

The ongoing low interest rate environment has stimulated interest from investors in higher yielding fixed income exposures, while demand for bond ETFs continues to grow. Assets under management in bond ETFs grew by 41 per cent in 20142.

Q&A

Which countries and sectors are the underlying indices most heavily weighted towards?

The db x-trackers II iBoxx EUR High Yield Bond UCITS ETF reflects the performance of 436 bonds from 33 countries1, with the biggest weightings to France and Luxembourg (each weighted at 17%), followed by Italy, the Netherlands and Germany. By sector, the financial sector has the highest weighting at 23%, followed by consumer goods and industrials (15% each).

The underlying Index for the db x-trackers II iBoxx EUR High Yield Bond 1-3 UCITS ETF currently covers 97 bonds from 19 countries. The largest countries and sectors are the same as for the broader index, although the weightings differ – 36% to financials, 16% to consumer goods and 13% to industrials3. To be included in the indices the bonds must have a minimum €250 million outstanding.

What sort of credit ratings do the underlying companies in these indices have?

Seventy-two percent of the bonds included in the db x-trackers II iBoxx EUR High Yield Bond UCITS ETF are rated ‘BB’, with 25% rated ‘B’3. According to rating agency Standard & Poor’s, ‘BB’ means the company is secure for the foreseeable future but could encounter difficulties if the economy deteriorates. A ‘B’ rating means that difficult economic conditions could have a more detrimental impact4.

What are the target investor groups for these new ETFs?

With current prevailing low interest rates, combined with the fact that certain investment groups have requirements to invest in fixed income, demand for high-yield corporate bond exposure should be high. The ETF tracking the 1-3 year maturity segment of the market may be of interest to investors seeking to minimize their investment’s sensitivity to interest rates. Meanwhile, sophisticated investors may find short daily bond ETFs useful for short-term hedging against price corrections.

1 Source: Markit Ltd, as at 31/12/14

2 Source: Deutsche Bank Research, 24 December 2014

3Source: Markit Ltd, as at 11/12/14

4 Source: Standard & Poor’s .The analyses, including ratings, of Standard & Poor’s Ratings Services and its affiliates are opinions and not statements of fact or recommendations to purchase, hold, or sell securities. They do not address the suitability of any security, and should not be relied on in making any investment decision. Standard & Poor’s Ratings Services does not act as a fiduciary or an investment advisor except where registered as such. STANDARD & POOR’S and S&P are registered trademarks of Standard & Poor’s Financial Services LLC.

Source: ETFWorld.co.uk