Should Corporate Credit ETFs exclude Financials?
If investors want to focus on pure corporate debt with no bank risk and without taking on much interest rate duration risk, ULTUMUS’ global daily data on ETF launches has identified the new L&G Corporate Bond ex-Banks Higher Ratings 0-2Y UCITS ETF, tracking the J.P. Morgan Global Credit Index (GCI) Ultra Short ex Banks 2% Issuer Capped Index.
L&G argue that bank paper has become such a big part of the market cap weighted corporate bond indices that benchmarking to an index including bank instruments would result in too much sector concentration.
The case for excluding bank related paper could be to let investors pick and choose their favourite ETFs to access different parts of the bank capital structure, which covers a wide risk spectrum. The most senior bank debt may be very low risk but there are many levels and layers.
The “too big to fail” argument that big banks are effectively backstopped by Governments is open to debate and risks can vary with different sorts of instruments and countries. For instance, when Credit Suisse failed in 2023 its AT1 CoCos (contingent convertibles) were “bailed in” and lost all value, while the shareholders actually salvaged a small amount of value from the UBS takeover. There have also been “bail ins” of some bank paper in relation to failures and restructurings in Italy and Portugal in recent years. Retail investors in some countries such as the UK may be restricted from investing in instruments such as CoCos.
Whatever your opinion may be on whether or not to include banks, it is good for investors to have more choice of products. Some more active traders may enjoy switching between corporate and financial credit – and could have majored on the bank paper after the March 2023 mini-banking crisis.
The bonds held are all investment grade with a minimum credit rating of A minus, which is above the lowest investment grade rating of BBB plus.
Hedged and unhedged Euro share classes are available. The unhedged one charges 0.12% and the hedged one 0.15%. This is roughly in the middle of market rates for a European listed corporate credit ETF: iShares Core € Corp Bond UCITS ETF charges 0.20% and Vanguard’s EUR Corporate Bond UCITS ETF - (EUR) Accumulating (VECA) charges 0.09%.
In the US of course fees are lower. iShares has several investment grade corporate bond ETFs (IGLB, IGSB, USIG) charging 0.04%, and SPDR has others at the same price point, but this is not surprising. As the monthly ULTUMUS flow report shows ETF fees in general are lower in the much larger US market.
