Deutsche Asset & Wealth Management (Deutsche AWM) has launched a quality-weighted Eurozone sovereign bond exchange-traded fund (ETF), marking its entry into the fixed income strategic beta market….
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Martin Weithofer, Deutsche AWM’s head of strategic beta
db x-trackers iBoxx Eurozone Sovereigns Quality Weighted UCITS ETF (DR)* listed on the Deutsche Börse today. It provides exposure to an index of Eurozone sovereign bonds that have been weighted based on criteria that focus on providing higher exposure to better quality issuers (see Notes to Editors for more detail). This is different to traditional fixed income sovereign benchmarks, which typically weight constituents by issuance volume, hence providing the highest weighted exposure to the most indebted countries.
Strategic beta – also known as ‘smart beta’ – refers to products that vary from traditional weighting methodologies. Such ETFs are becoming more common on equity benchmarks, but there are few strategic beta fixed income ETFs on the European market.
“The aim of this ETF is to provide a straightforward method of acquiring quality-focused sovereign bond exposure, and to provide investors with the potential for an improved risk versus return profile,” said Martin Weithofer, Deutsche AWM’s head of strategic beta. “The quality weighted index provides similar returns to the traditional index but with potentially lower volatility and a smaller maximum peak-to-trough decline.”
The ETF tracks a new index – the Markit iBoxx EUR Eurozone Sovereigns Quality Weighted Index. Eligible bonds are selected in accordance with a quality adjustment methodology that underpins the index and involves grading sovereign issuers based on a series of fundamental measures, such as unemployment and inflation rate, history of default, sovereign debt as a proportion of GDP and GDP growth rate.
Countries that are currently over-weighted in the quality benchmark – relative to the traditional non-weighted sovereign index – include Germany and the Netherlands. Countries that are currently relatively under-weighted in the quality benchmark include Italy and Spain. By weighting based on fundamental factors, the quality index helps to counteract the tendency for fixed income benchmarks to weight in favour of the most indebted issuers.
The ETF is a physical replication fund and has an annual All-in Fee of 0.20%.