So much for a lazy summer—the ETF industry is roaring along, with 26 launches in June, and July looking to be just as busy. Today alone, 10 more ETFs from four different issuers are rolling out to investors.
iShares Debuts 4 Funds On 2 Exchanges
iShares is leading the pack, with four ETFs being introduced—two yield-focused bond funds listing on the Bats exchange and two environmental, social responsibility and governance (ESG) bond funds listing on the Nasdaq. Bats is owned by ETF.com’s parent company, CBOE.
The two funds launching on the Nasdaq include the iShares ESG 1-5 Year USD Corporate Bond ETF (SUSB) and iShares ESG USD Corporate Bond ETF (SUSC). SUSB, which covers investment-grade corporate debt securities with maturities between one to five years, comes with an expense ratio of 0.12%, while SUSC charges 0.18%.
The former is basically a subset of the latter. SUSB tracks an index derived from the Bloomberg Barclays US Corporate 1-5 Years Index, while SUSC’s benchmark is derived from the broader Bloomberg Barclays US Corporate Index. SUSB’s index includes 543 issues drawn from 20 countries, while SUSC’s index covers 2,297 issues drawn from 24 countries.
“These new products are the first exposures of their kind in an ETF wrapper, and complement iShares’ existing ESG suite,” said Martin Small, U.S. head of iShares, in reference to the funds.
Both ETFs’ indexes rely on methodologies that evaluate companies for their positive traits relating to ESG, while still seeking to preserve the risk and return metrics of the parent index. The approach first screens out companies that are involved in the tobacco and “controversial” weapons industries as well as companies that are affected by business controversies that MSCI deems “severe.”
From there, the methodology evaluates each remaining company based on key ESG issues, on how those issues represent potential costs or opportunities for the firm and on how the firm responds to those costs and opportunities.
Companies are evaluated relative to their industry peer groups and with regard their geographic risk. Ultimately, they are assigned a score that takes into account how a firm performs on each key issue, and those scores are used in determining weightings, the prospectus said.
Yield-Focused Bond Funds
The two smart-beta bond funds launching on Bats include the iShares Edge High Yield Defensive Bond ETF (HYDB) and the iShares Edge Investment Grade Enhanced Bond ETF (IGEB). The funds come with expense ratios of 0.35% and 0.18%, respectively. Both target the quality and value factors, a press release noted.
HYDB tracks the BlackRock High Yield Defensive Bond Index, an index of junk bonds with a face amount outstanding of at least $350 million and at least one year of remaining maturity. Component securities must be denominated in U.S. dollars but can be issued by domestic or foreign corporations.
The fund has a significant weighting in industrials companies. The index methodology is designed to screen out securities of the companies most likely to default, and the index is optimized in such a way that is intended to enhanced its returns while limiting risk and turnover, the prospectus said.
IGEB, on the other hand, tracks the BlackRock Investment Grade Enhanced Bond Index, which targets domestic and foreign investment-grade debt denominated in U.S. dollars and having a face amount outstanding of at least $500 million. It is similar to HYDB in its design, favoring the bonds of companies that have a low likelihood of default, weighting them in such a way as to enhance returns and keeping a lid on risk and turnover.
The press release also notes that the two funds are the first to track BlackRock’s own in-house indexes.
MBS Fund Fee Cut
In addition to launching four funds, iShares is drastically cutting the fee for its iShares MBS ETF (MBB). In an effort to make the fund the “tool of choice” for investors looking to access the mortgage market, the firm is lowering MBB’s fee from 0.27% to 0.09%.
“By lowering the price to make the fund competitive with direct investment in mortgage securities, institutions will have a much more efficient, liquid option for dynamically managing mortgage-backed exposures,” said Small.
MBB first launched in 2007 and has more than $10 billion in assets under management. It is the largest fund in the space, and the move by iShares will turn it into the second-cheapest fund as well. The $4.1 billion Vanguard Mortgage-Backed Securities ETF (VMBS) has an expense ratio of 0.07%.