Db X-trackers has leaped into the smart beta fixed income space with the launch of an exchange traded fund (ETF) that tracks an index of Eurozone sovereign bonds – with one major difference. Instead of the bonds in the index being ranked by the amount of outstanding debt, the bonds are ranked in terms of the quality of their sovereign issuer e.g. France or Germany.
The sovereign issuers are rated on various factors including unemployment, inflation, history of default, sovereign debt as a proportion of GDP and their GDP growth rate. These factors mean there is a strong weight attached to Germany and the Netherlands, whereas Spain and Italy have smaller proportions.
The new db X-trackers iBoxx Eurozone Sovereigns Quality Weighted UCITS ETF (ticker XESQ) listed in Germany and has annual fees of 0.20 percent.
"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 Asset Wealth Management'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."
Db X-trackers launched its first smart beta ETF range in September 2014, which focused on equities. One of its most recent fixed income launches was an ETF that tracks a pool of liquid and investment grade corporate USD-denominated bonds, also costing 0.2 percent.