Deutsche expands ‘yield plus’ suite with USD corporate bond ETF

Mar 14th, 2018 | By | Category: Fixed Income

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Deutsche Asset Management has added a new ‘yield plus’ corporate bond ETF to its product line-up with the launch of the Xtrackers iBoxx USD Corporate Bond Yield Plus UCITS ETF (XYLD) on the London Stock Exchange and Deutsche Börse.

Deutsche adds USD corporate bond ETF to yield-plus suite

Deutsche Asset Management’s latest ETF provides exposure to higher yielding, mostly investment grade, corporate bonds denominated in US dollars.

The fund tracks the Markit iBoxx USD Corporates 1-20 Yield Plus Index, providing exposure to higher yielding, mostly investment-grade, corporate bonds denominated in US dollars.

The fund tracks the index via direct replication using an optimised sampling process.

To be eligible for the index, bonds must have a time remaining to maturity of greater than one year and an average rating of investment grade at time of inclusion; however, bonds that are subsequently downgraded to below investment grade – so-called ‘fallen angels’ – will remain in the index as long as they are not lower than rated BB- using an average agency ratings.

All eligible bonds are ranked according to their benchmark spreads in descending order, with the index focusing on the top 33% of bonds that comprise the parent Markit iBoxx USD Corporates Index, an index broadly constituting the US dollar investment-grade corporate bond market.

Bonds are weighted by market value outstanding, with a cap of 2% being applied at the issuer level. The index is rebalanced quarterly but monitored to comply with the rating and maturity criteria on a monthly basis.

The resulting index is composed of approximately 1,400 bonds and – true to its name – achieves a decent yield pick-up. Currently, it delivers an enhancement of 0.47% versus the broader investment-grade corporate bond index, with similar duration and BBB+ average rating.

Over two-thirds (67.9%) of the bonds in the index are rated BBB with most of the remaining exposure (25.4%) in bonds rated A. As expected, bonds from companies listed in the US make up the majority of the index with a 65.3% exposure. The next largest country exposures are China (5.5%) and the UK (2.4%).

The index has a yield-to-maturity of 4.4% and an effective duration of 6.7 years. Most of the bonds have remaining maturities between 7-10 years (36.5%), 15-25 years (18.8%), 3-5 years (15.8%) and 15.0%).

Income generated within the portfolio is distributed to investors, and the ETF has a total expense ratio (TER) of 0.25%.

Commenting on the launch, Olivier Souliac, Strategic Beta Fixed Income Specialist at Deutsche Asset Management, said: “Investors looking for strategic bond investments that improve the risk and return profile of their portfolios may be attracted to our new US dollar corporate bond yield plus ETF as it can generate a yield pick-up for currently little additional risk. It achieves this by extracting exposure to higher corporate risk premia, from a broader investment-grade corporate bond index, and keeping lower interest rate exposure than traditional ETFs.”

The ETF complements the issuer’s existing Xtrackers iBoxx EUR Corporate Bond Yield Plus UCITS ETF (XDEP) listed on the Deutsche Börse, SIX Swiss Exchange and Borsa Italiana. This ETF follows the same strategy, targeting higher yielding bonds, but instead denominated in euros. XDEP was launched in June 2016 and has since grown to over €240 million in assets under management. Its TER is also 0.25%.

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