ETF provider WisdomTree has launched the WisdomTree EUR Government Bond Enhanced Yield UCITS ETF (GOVE) and the WisdomTree EUR Aggregate Bond Enhanced Yield UCITS ETF (YLD) on the Deutsche Börse Xetra.
The firm writes that the strategies seek to take a more intuitive approach to indexing by seeking to provide enhanced yields on core European investment grade bonds and treasuries, without potentially riskier exposures.
The WisdomTree EUR Aggregate Bond Enhanced Yield UCITS ETF aims to achieve both a higher yield and a low tracking error with respect to the market benchmark, the Bloomberg Barclays Euro Aggregate Bond Index, which measures the performance of the investment grade, Euro denominated, fixed rate bond market, including treasuries, government-rated, corporate and securitized bonds.
WisdomTree writes that the ETF does this by following a rules-based approach which tilts the weights of the market benchmark towards higher yielding segments of the market while controlling risk and tracking error vs the market benchmark. TER is 0.18 per cent.
The WisdomTree EUR Government Bond Enhanced Yield UCITS ETF aims to achieve both a higher yield and a low tracking error with respect to the market benchmark, the Bloomberg Barclays Euro Treasury Bond Index, which measures the performance of the investment grade, Euro denominated, fixed rate government bonds issued by the sovereign countries participating in the EMU.
The firm writes that the ETF does this by following a rules-based approach to tilt the weights of the market benchmark towards higher yielding segments of the market while controlling for risk and tracking error versus the market benchmark. TER is 0.16 per cent.
Rafi Aviav, WisdomTree Head of Product Development in Europe, says: “The new ETFs launched today are an important addition to the European fixed income fund landscape. The strategy employed by both funds offers a unique solution for investors to potentially increase the yield they’re getting from the market while tightly controlling risk. By tilting towards yield the strategy aims to deliver on one of the most important attributes for fixed income investors, while avoiding excessive tracking error and risk-taking with respect to the benchmark.”
Christopher Gannatti, WisdomTree Head of Research in Europe says: “Many fixed income investors today are faced with two broad options: actively managed strategies or exchange traded products that track market capitalisation-weighted indices. However, this often leads to investors lending more capital to the issuers that already hold the most debt. Here we take a ‘smart beta’ approach to fixed income. We have taken two existing universes of fixed income securities and applied an algorithmic approach to try to “squeeze” as much extra income out of these constituents as possible while remaining sensitive to tracking error constraints, bringing the potential for alpha.”
The index methodology for each fund uses a three-step process for yield optimisation and incorporates the following:
· Step 1: Divide index constituents into buckets. The constituents are divided into buckets across either country and maturity (GOVE) or sector, country, maturity and credit quality (YLD).
· Step 2: Determine and apply constraints. To control risk and concentration while limiting turnover, a number of constraints are added (see below).
· Step 3: Determine bucket weights. Each month, weights of each Index are reallocated across the buckets to maximise yield while adhering to the constraints. The constraints are designed such that the resulting “enhanced yield” indices are managed against the risk of undue tracking error relative to the parent universes.
· Constraints:
Tracking Error: Tracking Error Volatility for each enhanced yield index should be less than 35 basis points each month when measured against its respective parent index.
Duration: Duration of each Index cannot be more than 1 year greater than that of either the Euro Treasury or the Euro Agg parent indices.
Country and Bucket constraints and sector and subcomponent constraints are applied. For the Bloomberg Barclays Euro Treasury Enhanced Yield Index, country weights cannot deviate by more than 20 per cent from their weight in the Euro Treasury Index whilst for the Bloomberg Barclays Euro Aggregate Enhanced Yield Index major sectors cannot deviate by more than 20 per cent from their weight in the Euro Agg index.
Bucket Size: To be eligible for selection a buckets market value must meet minimum requirements.
Turnover: Portfolio turnover due to monthly rebalancing is capped at 5 per cent.
