Invesco Launches Two Euro Corporate Bond ESG ETFs That Use Multi-Factor Investing To Overcome Traditional Yield Shortfall

Invesco is launching two ETFs that are intended for sustainably minded investors looking for Euro-denominated corporate bond exposure without having to compromise their principles or yield. Leveraging the expertise of the Invesco Quantitative Strategies (“IQS”) team, the new ETFs will offer a choice of exposures either across the full maturity spectrum or focusing only on short duration, which the ETF is defining as bonds with no more than five years to maturity.

• Invesco EUR Corporate Bond ESG Multi-Factor UCITS ETF
• Invesco EUR Corporate Bond ESG Short Duration Multi-Factor UCITS ETF

Paul Syms, Head of EMEA Fixed Income ETF Product Management at Invesco, said: “Fixed income has become much more interesting this year. Yields on European credit are at the highest levels we’ve seen in a decade due to a combination of higher interest rate expectations and wider spreads over government bonds. Fixed income investors have more to consider now than in recent years, especially if they have sustainability as well as financial objectives. Our newest ETFs allow investors to position their portfolio to reflect their own economic views, either investing across the full maturity curve if they believe yields are close to peaking or focusing on short maturity if they are concerned interest rates could rise further than is currently being priced into the market.”

Erhard Radatz, Senior Portfolio Manager, Invesco Quantitative Strategies (“IQS”), explained: “Introducing environmental, social and governance principles into a corporate bond portfolio typically means sacrificing yield relative to a standard non-ESG benchmark. That is due partly to the exclusion of traditionally higher yielding segments and because issuers that are reducing their ESG-related risks tend to be higher quality and, therefore, offer lower yields. You could address the yield shortfall by overweighting issuers with lower credit ratings, but that may not be in investors’ best interest. Instead, we use a factors-based approach to re-establish characteristics such as duration and credit risks so that the ESG portfolio is more aligned with the standard benchmark.” 

Each of the new Invesco ETFs will invest in a portfolio of primarily fixed-rate euro-denominated unsecured corporate bonds from global issuers with an investment grade credit rating, whether across the entire maturity range or, for the Short Duration ETF, only those with no more than five years to maturity. Up to 30% of each portfolio may be invested in unsecured corporate bonds denominated in other currencies with the currency risk hedged back to euros at the Investment Manager’s discretion. Securities are selected based on their compliance with the fund’s ESG policy and attractiveness determined by the Investment Manager’s quantitative investment model.

The ESG policy incorporates both exclusionary criteria and a “best in class” approach, which selects securities from each industry that score highest according to the Investment Manager’s scoring system. A quantitative investment process is then applied to the remaining eligible securities and produces a measure of their attractiveness based on three major factors: value, low volatility and carry. Individual portfolios are created based on each of these three factors and then combined to achieve an equal risk contribution by each individual factor. This factor overlay aims to mitigate potential factor imbalances introduced by the ESG criteria.

Gary Buxton, Head of EMEA ETFs and Indexed Strategies at Invesco, said: “Most ETFs you’ll find in the market are passive, but we recognise an active or quantitative approach may deliver a potentially better outcome in certain situations. By ‘better’ I mean more aligned with the investor’s objectives and risk-return expectations. That’s why we adopt an unbiased approach to product development, with decisions ultimately driven by investor demand and market dynamics. Where appropriate, we can leverage expertise within Invesco’s global resources, such as our IQS team’s more than 30 years’ incorporating factor-based investing and ESG into client portfolios.”

The performance of these two ETFs may be compared to the appropriate Bloomberg Euro Corporate Bond Indices, but for comparison purposes only. They do not track an index nor are they constrained by a benchmark.

These fund launches raise the number of ESG ETFs within Invesco’s range to 28, covering equity and fixed income exposures for almost every geographical region as well as thematic ETFs. 

*Distributing class shares are also available