Bonds, emerging markets and ESG investing: the USB ETF is very balanced

In the ESG bond market there are good investment opportunities, especially in emerging markets: the general situation is favorable, this Usb ESG ETF selects bonds in a balanced way and respecting the criteria of sustainable finance.

usb etf

The Covid-19 pandemic has given greater impetus to many trends already underway, two examples are certainly the digitization of companies and ESG investments (sustainable finance). Especially for the second trend, it is important to highlight that everywhere in the world, especially in the United States, Europe and China, governments are preparing large investments: almost an obligation, because climate change and the exploitation of resources require changes in the global lifestyle. Huge masses of money will be moved, money to be found in the markets also thanks to the good returns of ESG investments.

The bond market of developed countries does not offer great opportunities from this point of view, while emerging countries offer very interesting opportunities. Among the most active investment banks is the Swiss UBS, which launched the Bloomberg Barclays MSCI Global Liquid Corporates Sustainable UCITS ETF months ago and which also offers the JP Morgan USD EM IG ESG Diversified Bond UCITS ETF, an ESG bond ETF based on emerging markets.

UBS ETF tracks the Bloomberg index of emerging market bonds with ESG criteria of sustainable finance

As any exchange traded fund (passively managed fund that replicates the performance of an index), this ESG ETF by UBS also allows you to benefit from the flexibility typical of investments traded on the stock exchange, and offers access to an entire market segment with a single transaction, obtaining a diversified risk and return profile.

In detail, this UBS ESG ETF tracks, gross of fees, the performance in terms of price and coupon yield of the J.P. Morgan USD EM IG ESG Diversified Bond Index (Total Return). This market index reflects the performance of US dollar-denominated fixed and floating rate emerging market bonds with investment grade ratings issued by sovereign, quasi-sovereign and corporate entities. In addition, currency hedging aims to reduce the impact of exchange rate fluctuations between the reference currency and the index currency.

The J.P. Morgan USD EM IG ESG Diversified Bond Index is constructed with various measures both in terms of diversification and in terms of selecting ESG investments (Environment, social and governance). The basket combines portions of two indices also made by J.P. Morgan: J.P. Morgan EMBI Global Diversified and the J.P. Morgan CEMBI Broad Diversified, which only considers bond issues with a minimum denomination of $ 500 million.

A filter is then applied to the geographical concentration of the bonds: the limit of 5% by country offers a broader diversification, also at the issuer level, which makes the performance more balanced by mitigating the specific risks of the individual debtor.

A very balanced and well built ESG ETF

Then we come to the advanced ESG selection methods in three steps: in a first screening, businesses that have to do with coal, weapons, tobacco and that violate the “Global Compact”, the United Nations global pact created to companies around the world to adopt sustainable policies and in compliance with corporate social responsibility.

Green bond issuers are rewarded with a higher score range, a system to incentivize sustainable financing by giving green bonds a greater weight in the index. The general selection of issuers (of all bonds) provides for five ESG score classes: those with a higher score will be overweighted compared to those with lower scores, while those in band 5, the least developed, will be excluded.

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