ESG screened junk bonds from DWS
DWS is launching two new EUR and USD denominated junk bonds that bring ESG screens to bond selection.
- Xtrackers ESG USD High Yield Corporate Bond UCITS ETF (XZHY)
- Xtrackers ESG EUR High Yield Corporate Bond UCITS ETF (XZHE)
The funds track the Bloomberg MSCI US High Yield Sustainable and SRI Index and the Bloomberg MSCI EUR High Yield Sustainable and SRI Index. The way the indexes are built is that Bloomberg provides the bond data while MSCI provides the ESG data.
The indexes take bonds issued by companies with junk ratings. Bonds need at least one year remaining until maturity, and must have at least $500 million or €500 million par value outstanding. Issuer weights are capped at 3% to ensure diversification.
The ESG screen is both negative and positive. The negative screen removes companies in the usual bad areas of alcohol, gambling, tobacco, weapons, pornography, and GMO.
The positive side rates companies based on how good they are on MSCI’s extensive criteria. The worst offenders get excluded.
The funds charge 0.25%.
Bernie’s commentary – reinventing USHY
DWS mammoth junk bond ETF HYLB is one of the best products of its kind on the market; perhaps the best. The fund has $4.3 billion and charges the lowest fee of any junk bond ETF. It’s also sitting pretty in a strategic niche as Vanguard refuses to launch a high yield bond ETF due to the lack of liquidity in the underlying bonds.
So this product launch makes sense – these funds are essentially built as sub funds of HYLB. My guess would be that the ethical screens are there to keep some institutional investors – possibly European pension funds – happy.
If I had a question, it would be around how the ethical screens are going to change the sector compositions and what that means for risk management, if anything. There’s no sector data on DWS’s website that I can see at this stage.