Legal & General Investment Management (LGIM) has launched a five-strong core fixed income ETF range that incorporates environmental, social and governance (ESG) metrics.
Tracking JP Morgan indices, the five ETFs offer exposure to gilts, sterling corporate bonds, 0-5 year sterling corporate bonds, emerging market government bonds and China bonds.
All five ETFs provide a higher allocation to green bonds and issuers with the highest ESG scores while also excluding the bottom quintile of issues based on their ESG scores.
This includes a screen to exclude certain industries such as controversial weapons manufacturers, thermal coal miners, tobacco companies, oil sands from 29 January 2021 and violators of the UN Global Compact.
LGIM said the indices have been designed to also employ a liquidity-aware approach that includes an increased minimum issuance threshold relative to traditional benchmarks.
The range also addresses other inefficiencies commonly found in fixed income index investing such as crowded trades and putting cash to work more efficiently. The ETFs can remain invested in fallen angels for up to six months after downgrade as well as remaining invested in bonds closer to maturity.
The L&G UK Gilt 0-5 Year UCITS ETF (UKG5), L&G ESG GBP Corporate Bond 0-5 Year UCITS ETF (GBP5) and the L&G ESG GBP Corporate Bond UCITS ETF (GBPC) are listed on the London Stock Exchange in sterling.
Meanwhile, the L&G ESG Emerging Markets Government Bond UCITS ETF (EMD5) and the L&G ESG China CNY Bond UCITS ETF (DRGN) are also listed on the Deutsche Boerse and the Borsa Italiana in US dollars, sterling and euros.
UKG5 has the lowest total expense ratio (TER) at 0.06% while GPB5 and GBPC charge 0.09%. EMD5 and DRGN have TERs of 0.25% and 0.30%, respectively.
What is driving the increasing demand for fixed income ETFs?
Howie Li (pictured), head of ETFs at LGIM, said: “Liquidity and ESG integration in bond investing are among the top considerations for fixed income investors.
“Our client feedback has been clear that the ETF industry needs to provide fixed income tools that better reflect the forward-looking investment landscape.
“We set out to pro-actively design bond indices that address the liquidity and ESG requirements of modern investors.”
Lee Collins, head of index fixed income at LGIM, added: “It was important to us that we could incorporate some of our pragmatic portfolio management techniques into the index design itself, thereby allowing us to take full advantage of opportunities to create real value for investors.”
The expansion of LGIM’s core ETF range comes two years after the issuer entered the plain vanilla space in November 2018 with the launch of a six-strong equity ETF suite offering exposure to UK, US, Europe, Japan, Asia Pacific ex-Japan and global developed markets.
This is the firm’s first foray into fixed income ETFs since it closed four bond strategies in August 2019 that were a joint venture with Lombard Odier Investment Management.
