DB X-trackers launches liquid sterling-denominated corporate bond ETF

Jul 9th, 2012 | By | Category: Fixed Income

DB X-trackers, the ETF platform of Deutsche Bank, has announced the launch of the DB X-trackers II iBoxx GBP Liquid Corporate 100 Index ETF (XG7C), an ETF that provides exposure to liquid sterling-denominated investment-grade corporate bonds.

DB X-trackers launches liquid sterling-denominated corporate bond ETF

The DB X-trackers II iBoxx GBP Liquid Corporate 100 Index ETF (XG7C) provides exposure to liquid sterling-denominated investment-grade corporate bonds.

Listed on the London Stock Exchange, the DB X-trackers II iBoxx GBP Liquid Corporate 100 Index ETF (XG7C) tracks the Markit iBoxx GBP Liquid Corporate 100 Index.

This index provides exposure to up to 100 sterling-denominated corporate bonds that have been screened for liquidity. To qualify for the index all eligible bonds must have a remaining time-to-maturity of at least two years and a minimum amount outstanding of £400 million.

All bonds need to have an average rating of investment grade. Ratings from Fitch, Moody’s and Standard & Poor’s are considered. If more than one agency provides a rating, the average rating is attached to the bond. Of the 100 components in the index, less than 1% of receive the top ‘AAA’ credit rating; most (57.26%) are in the upper-medium grade ‘A’ rating bracket.

Broadly, an ‘A’ rating means the issuer has strong capacity to meet financial commitments, but is somewhat susceptible to adverse economic conditions and changes in circumstances.

In terms of country weights, issuers from the UK make up 46.2%, while the Netherlands contributes 14.6%, the US 13.5%, Australia 5.1% and Sweden 5.0%. In total there are 15 issuer countries included in the index. The top five individual underlying names are Barclays Bank, Rabobank, Imperial Tobacco, Vattenfall and Wal-Mart. As of July 4, the index had a yield-to-maturity of 4.47%.

“There has been strong demand for corporate debt exposure this year, so having this liquid, low-cost access tool will be useful for investors,” said Manooj Mistry, head of DB X-trackers for the UK. “We’ve developed our sterling corporate bond ETF to provide investors with the exact returns of the index minus the fixed total expense ratio. This is a big advantage on traditional corporate bond ETFs, where the investor has to accept tracking difference risk, which can be substantial because of the potentially illiquid nature of the underlying.”

The fund is synthetically replicated – meaning Deutsche Bank is able to deliver the exact returns of this index to the ETF – via a fully-collateralised swap. There is full transparency to both the index holdings and the underlying collateral basket. Incidentally, the underlying collateral basket appears to be of a higher credit quality than the target index; 100% of the swap collateral is in government bonds, with over 60% holding a ‘AAA’ rating (as of July 6).

The fund is UCITS IV compliant, eligible for ISAs and SIPPs and has UK Fund Reporting Status. The TER is 0.20%.

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