Industry Updates

DWS to shorten duration, add ESG filter and slash fees on corporate bond ETF

Revamped ETF will implement ESG criteria

Theo Andrew

a chessboard full of money

DWS has proposed an index switch on one of its corporate bond ETFs that would see it slash duration and fees as it looks to capture the performance of the short-duration corporate bond market.

In a shareholder announcement, DWS said the Xtrackers iBoxx USD Corporate Bond Yield Plus UCITS ETF (XYLD) would switch from tracking the Markit iBoxx USD Corporates 1-20 Year Plus index to the Bloomberg MSCI USD Corporate Sustainable and SRI 0-5 Years index.

Following the switch, XYLD will see its name change to the Xtrackers ESG USD Corporate Bond Short Duration UCITS ETF, under the same ticker.

The total expense ratio (TER) of the ETF will be reduced from 0.26% to 0.16%. The Lyxor $ Floating Rate Note UCITS ETF (BUOY) is the only other ETF to track the index and has a TER of 0.10%.

As alluded to in the name, the change introduces an ESG screen to the ETF. It will exclude companies not rated by MSCI ESG research, rated BB or below, have a controversies score of ‘red’, make a certain amount of revenue from controversial activities or any link to weapons or any fossil fuel reserves.

As a result, XYLD has been classified as Article 8 under the Sustainable Finance Disclosure Regulation (SFDR).

DWS said: “The new reference index is designed to reflect the performance of the investment grade, dollar-denominated, short-duration corporate bond market, excluding bonds which do not fulfil specific ESG criteria.”

The short end of the fixed income market has been favoured over the past 12 months as investors look to minimise the threat of interest rate risk as inflation continues to rise.

US inflation was up 7% year-on-year in December and the US central bank has given a strong indication that it will hike rates this year.

It is a significant shift for XYLD which has a 77.4% weighting to bonds with maturities of five years and over.

Under the new index, the fixed income ETF will have a 22.5% weighting to bonds with a one year and under maturity, 67.7% tracking one to three years and 9.9% tracking three-to-five-year bonds.

Shareholders will vote on the proposed changes at an extraordinary general meeting on 4 February with plans to switch the index on 23 February.

In September 2020, DWS launched the Xtrackers US Treasuries Ultrashort Bond UCITS ETF (XT0D), with a maximum maturity of three years for floating rate and one year fixed-rate US Treasury securities.

It is the latest index switch for DWS which has added an ESG filter to several products recently.

Last November, the firm switched the index on the $687m Xtrackers Global Aggregate Bond Swap UCITS ETF (XBAG) from the Bloomberg Global Aggregate Bond index to the Bloomberg MSCI Global Aggregate Sustainable and SRI Currency Neutral index.

Related articles

Featured in this article

Logo for DWSLogo for BloombergLogo for MSCI