ETF Watch: Deutsche Launches High Yield Corp Bond Fund

Deutsche Asset Management is launching an ETF that will cover high-yield corporate debt denominated in U.S. dollars. The Deutsche X-trackers USD High Yield Corporate Bond ETF (HYLB) will go head to head with the $16.5 billion iShares iBoxx $ High Yield Corporate Bond ETF (HYG).

The new fund is listed on the NYSE Arca exchange.

HYLB comes with an expense ratio of just 0.25% compared with HYG’s 0.50%. HYLB will also compete with the SPDR Bloomberg Barclays High Yield Bond ETF (JNK), HYG’s primary adversary, with $11 billion in AUM. JNK costs 0.40%.

Arne Noack, a director in Deutsche Asset Management’s exchange-traded products group, says his firm made a very deliberate decision on the pricing of HYLB.

“This is exactly how we compete. The idea of the index is to be a beta index, similar to the existing market leaders, and we believe the U.S. marketplace deserves a more cost-effective product,” he said.

Noack also indicated that the new fund is designed to be very similar to the existing behemoths in the space. “We expect a certain degree of fungibility between the ETFs now available,” he said, noting that while longtime investors in HYG or JNK will not necessarily want to switch their assets over, they may invest new assets in HYLB in order to lower the average expense ratio of their high-yield debt allocation. Investors who are not affected so much by capital gains might be more inclined to switch.

'Efficient Vehicle'

Noack says Deutsche is having conversations with investors throughout the ETF ecosystem, including liquidity providers and market makers, to make sure that “our product is firmly on the map of everyone and really becomes an efficient vehicle right from the get-go.”

Although HYLB’s underlying index has almost 1,200 components, the fund will use a representative sampling strategy to replicate the index’s performance. The prospectus notes that the index itself is designed to be more liquid than the high-yield U.S. bond universe as a whole. In addition to qualifying as subinvestment grade, components are required to be issued by companies in developed markets, issued by companies that have at least $1 billion in outstanding value, have at least $400 million in outstanding face value, have at least one year but less than 15 years to maturity.

“What we’re doing in fixed income is certainly of strategic importance to us,” Noack said, noting that Deutsche is in the process of building out its fixed-income offering.

“The fixed-income markets are important to us. We will be very, very thoughtful in bringing product to market,” he added. Noack pointed out how Deutsche launched international bond ETFs earlier this year that break new ground and its plans to launch a quality-weighted bond ETF in the future.

“Essentially, for every space that we want to cover, we will have a very distinct approach to that asset class,” he said.

Contact Heather Bell at [email protected].