Fixed income ETFs dominate top 5 European launches in 2016

Nov 7th, 2016 | By | Category: Fixed Income

Fixed income has dominated the most popular exchange traded fund launches in Europe so far this year as investors have been on the hunt for yield.

Fixed income ETFs dominate top 5 European launches in 2016

Jose Garcia-Zarate, Associate Director of Passive Strategies Research for Morningstar.

According to Morningstar data, 115 ETFs have launched through the end of October 2016. This compares to 150 ETFs – 135 excluding exchange traded notes – during the same period of 2015.

Three out of the top five funds in terms of asset-gathering until 31 October invest in fixed income, and one is a sustainable-focused bond fund – another strong indication of current investor trends.

1) Lyxor US$ 10Y Inflation Expectations UCITS ETF USD (LON: INFU)

INFG launched in April and has gathered over €299m in assets under management (AUM), tracking the Markit iBoxx USD Breakeven 10-Year Inflation Index. 

“No prizes for guessing that investors are becoming concerned with rising inflation,” said Jose Garcia-Zarate, Associate Director of Passive Strategies Research at Morningstar Europe. “This ETF focuses on the US, and I guess it has proved so popular because the Fed has been so reluctant to hike rates, thus encouraging expectations that inflation might rise to uncomfortable levels.”

The fund tracks a long position in the six last issuances of US 10-year Treasury inflation-protected bonds and a short position in US Treasury bonds of similar duration. “The difference in yield between these bonds is commonly referred to as a ‘breakeven rate of inflation’ and is considered to be a measure of the market’s expectations for inflation over a specified period of time.”

It is up 1.9% over the last three months in USD terms.

2) iShares Euro Corp Bond Sustainability Screened 0-3 year UCITS ETF (LON: SUSE)

Garcia-Zarate said it was important to note that one fund in the top five had a sustainable screening overlay. “Ethical and sustainable investing is becoming a strong trend, both for institutional and retail investors,” he said.

The fund holds 456 bonds of investment-grade status, each with an MSCI environmental, social and governance (ESG) rating of 4 or above. It has approximately 26% exposure in France, 14% in Germany and 9% in Spain.

The fund launched in January and has grown to over €292m in AUM. It costs 0.25% and is up 0.1% over the last three months in euro terms.

3) iShares US Mortgage Backed Securities UCITS ETF (LON: IMBS)

The physically-replicated fund launched in May and has since gathered over €259m in AUM. It tracks 46 securities from government-sponsored enterprises like Ginnie Mae, Fannie Mae and Freddie Mac. These are ‘pass-through securities’ meaning that both interest and principal payments are delivered directly to the investor. Each MBS within the ETF holds a AAA credit rating.

These products are often popular with investors as they are generally considered extremely safe (due to their backing or sponsorship by the US government) but can yield 1-2% more than similar Treasury securities.

The fund costs 0.28% and is up 0.1% over three months in USD terms.

4) db x-trackers MSCI World Health Care (DR) UCITS ETF (LON: XDWH)

“As the only equity ETF on the list, the one thing that stands out is the defensive nature of the sector,” said Garcia-Zarate. “Healthcare is non-cyclical. But also, it seems that some investors are playing the demographic card here. Industries that cater for the needs of increasingly ageing populations in the developed world, such as healthcare, have become a very popular theme with investors.”

The fund came to market in March and has gathered over €149m in AUM. It costs 0.45% and has fallen 11.5% over the last three months in USD terms.

5) iShares Fallen Angels High-Yield Corp Bond UCITS ETF (LON: WING)

This fund offers fixed income exposure with a twist – it only invests in corporate bonds which have been recently downgraded from investment grade to non-investment grade.

“This means that these bonds have to be sold off by any fund with an investment grade-rated mandate, thus potentially generating a value opportunity in price in addition to the pick-up in yield,” said Garcia-Zarate.

WING launched in June and is up 1.8% in three months in USD terms. The fund costs 0.50% and has over €149m in AUM.

Tags: , , , , , , , , , , , ,

Leave a Comment