Product Panel: LGIM’s fixed income ESG ETF range

The seven-strong ETF range employs an ESG screen and liquidity screen

Tom Eckett

a group of men

ETF Stream’s Product Panel has weighed in on Legal & General Investment Management’s (LGIM) foray into the core fixed income ETF space.

The seven-strong ETF suite looks to address some issues in fixed income index investing such as crowded trades and putting cash to work efficiently while also increasing the minimum issuance threshold to improve liquidity.

The ETFs also implement an ESG screen which excludes certain industries such as controversial weapons, thermal coal miners, tobacco companies, oil sands and violators of the UN Global Compact.

The seven ETFs are:

Commenting on the launches, Howie Li, head of ETFs at LGIM told ETF Stream: “The suite has been designed to reflect investors’ need to position their portfolios to manage the new risks and opportunities facing fixed income markets.

“This includes taking active steps in considering how capital is now being allocated in today’s world to reflect ESG considerations and liquidity concerns.”

What the panel says:

Jose Garcia-Zarate (pictured left), associate director, passive strategies, manager research, Europe, Morningstar

LGIM’s late arrival to the ETF space left them with two broad courses of action to try to make a mark; undercutting the incumbents in fee terms (not a guarantee for success!) or telling the world they are coming up with something a bit different.  

They have chosen the second option. The strong increase in interest for ESG has allowed them to introduce themselves to ETF investors as a provider of ESG bond ETF options. This is not strictly a novelty, as there are other providers which have been tapping into the ESG bond space for a while.

The bond market exposures they have chosen are pretty mainstream, even from an ESG perspective. But what LGIM said is that they are combining ESG integration with improvements in the way bond passive funds are managed. For example, avoiding crowded trades around rebalancings or reinvesting coupons immediately to keep investors exposed to the market at all times.

LGIM has strong fixed income capabilities and only time will tell whether these moves will really add value to make their bond ETFs stand out. 

They are not the only ETF provider finetuning their bond ETF management practices. I guess the risk for investors may be that of accepting higher tracking error bandwidths. 

Athanasios Psarofagis (pictured centre), ETF analyst, Bloomberg Intelligence

I like these launches, especially the emerging markets-focused strategies. In this yield starved market environment, investors need to start looking at areas such as emerging markets.

Additionally, combining ESG and emerging markets makes sense as the data and reporting is not as accessible compared to developed markets.

The ESG component might lead to a lower yield but it is really going after quality issuance versus quantity of yield.

Henry Cobbe (pictured right), head of research, Elston Consulting

When we design model portfolios for providers, we have a plethora of choice for equity ESG exposures, but there has far less choice on the ESG bond side. 

That is why during ETF Stream’swebinar on fixed income ETFs last June, along with others, we were calling for the need for greater innovation in ESG bond ETFs, to plug the gaps. It was particularly urgent back then given we were helping a wealth manager launch their first ESG portfolios that very same month!

LGIM’s recent launch is therefore welcome, as it creates the ability to select more targeted fixed income exposures in a multi-asset context.

Some ETF issuers are using ESG as an upsell. So it is particularly welcome to see that at 0.09% TER for US ESG and 0.35% TER for EM ESG, these corporate bond ETFs are keenly priced: both relative to incumbents and relative to a vanilla exposure. And that is how it should be.