Fixed income and ESG flows are two themes standing out in the ETF market in 2022. Bond funds captured nearly 40% of all ETF net inflows during the year, while ETFs incorporating ESG considerations gathered 60% of the overall market flows. Invesco believes both themes could continue into 2023 but with potentially greater demand for corporate bond exposures rather than the government bonds that dominated flows in 2022.
Invesco continues to expand its corporate bond ESG range with the launch of the Invesco Global High Yield Corporate Bond ESG UCITS ETF. The ETF aims to track the Bloomberg MSCI Global High Yield Liquid Corporate ESG Weighted SRI Bond Index, which incorporates both exclusionary filters and tilting to overweight issuers with a strong ESG profile. It follows a similar methodology to Invesco’s investment-grade corporate bond ESG ETFs but with a focus on global high yield.
“Demand for fixed income ETFs has grown substantially in recent years, partly the result of greater understanding from investors but also because of the availability of new products. Government bonds took the lion’s share of fixed income assets in 2022, with the Invesco US Treasury Bond 7-10 Year UCITS ETF leading the pack with $3.3 billion of net new assets. We believe the pick-up in corporate bond flows seen towards the end of the year could continue in 2023 as a change in Fed focus away from fighting inflation and towards stimulating growth may support credit and high yield.”Paul Syms, Head of EMEA Fixed Income ETF Product Management at Invesco.
Securities are excluded from the index if they have an MSCI ESG rating below BB (or do not have a rating); have faced very severe controversies pertaining to ESG issues over the last three years; or are involved in alcohol, adult entertainment, genetically modified organisms, nuclear power, oil sands, thermal coal, tobacco, unconventional oil and gas or weapons.
Each of the eligible component securities is then assigned an ESG score using MSCI ESG metrics. This ESG Score is then applied to re-weight the eligible securities from their natural weights as a result of the notional size of the bond, to construct the weighting of the index. Issuers are capped at 5% of the market value of the index. The index rebalances monthly.
“It’s clear from market data that investors are increasingly choosing ETFs for the fixed income components of their portfolios. Investor demand has driven Invesco’s product development, leading to our expanded range of fixed income ETFs, with low-cost core exposures alongside those that provide access to more innovative segments of the market. This latest fund launch is our 26th fixed income ETF, representing just over 20% of our ETFs in Europe.”Gary Buxton, Head of EMEA ETFs and Indexed Strategies at Invesco.