Liquidity and ESG at the core of LGIM’s new fixed income ETF range

10 December 2020

Legal & General Investment Management (LGIM) has today announced the launch of its Core Fixed Income Exchange Traded Fund (ETF) range designed for UK and European wholesale and institutional investors.

Encompassing five funds, the range addresses investors’ increasing need to gain exposure to core fixed income assets with ESG and liquidity considerations integrated into the investment design. Across the range, LGIM draws on expertise from its active and index fixed income teams, which collectively manage $236 billion in assets, to add value that can be lost in index investing for the benefit of investors.

All five core fixed income ETFs will be listed on the London Stock Exchange (LSE) with the L&G ESG Emerging Markets Government Bond UCITS ETF and the L&G ESG China Bond UCITS ETF also listing on the Deutsche Börse and the Borsa Italiana.

The ETFs provide a higher allocation to green bonds and issuers with the highest ESG scores than traditional fixed income ETFs, while retaining a similar risk/return profile to traditional indices. The range also excludes the bottom quintile of issuers based on their ESG scores, as well as certain industries such as controversial weapons manufacturers, thermal coal miners, tobacco companies, oil sands (from 29 January 2021) and the violators of the UN Global Compact.

LGIM has designed for the index to employ a liquidity-aware approach, which includes increased minimum issuance thresholds relative to traditional benchmarks to improve the overall liquidity profile. The indices are specially optimised for liquidity, balancing portfolio and individual bond liquidity against potential performance trade-offs.

By leveraging on LGIM’s fixed income index experience, the investment strategy of the ETFs transparently addresses the inefficiencies commonly found in index investing. These indices have been designed to avoid crowded trades and to put cash to work more efficiently. Accordingly, investors in these ETFs have the potential to benefit from the price reversion that can be captured by avoiding crowded bond selling activity- these ETFs can remain invested in “fallen angels” for up to six months after downgrade as well as remain invested in bonds closer to maturity. They will reinvest cash generated from coupons immediately rather than, as commonly found in traditional bond indices, holding onto cash until the end of the month.

In order to execute on these design requirements, LGIM sought to work with an index partner that has a strong track record in managing bond indices as well as a robust process for ESG integration. Partnering with JPMorgan, the ETF range will leverage its ESG approach that incorporates well-recognised external ESG data and exclusions often required by responsibly-minded investors and asset managers.

The launch of the Core Fixed Income ETF range brings LGIM’s total ETF range to 33 funds, across its core and thematic suite, with total Assets under Management of$7.5bn

Source: Legal & General Investment Management