Really like what Vident has brought to the ETP domain, and they are now out with what I would describe as the worlds first Risk Parity ESG enhanced US Aggregate Bond ETF.
The Vident Core U.S. Bond Strategy ETF seeks to track the total return performance, before fees and expenses, of the Vident Core U.S. Bond Strategy Index.
The Vident Core U.S. Bond Strategy Index seeks to diversify and improve interest rate and credit risks of traditional U.S. Core bonds.
The Vident Core U.S. Bond Strategy Index is a rules-based, systematic strategy index comprised of all core U.S. bond sectors, including:
- U.S. Treasuries, US Agencies,
- Mortgage Backed Securities (MBS) and
- Investment Grade Corporates (“IG”), and two non-core sectors:
- High Yield Corporates (”HY”) and
- Treasury Inflation-Protected Securities (“TIPS”).
The strategy seeks to allocate capital in accordance with each bond sector’s risk contribution and principles- based investment approach to construct a systematic and structured investment process.
Net expense come in at 0.45%
The Index methodology consists of the following steps:
1. Establishing Risk-Weighted Baseline - The Index construction begins by establishing a risk-weighted baseline across various U.S. bond sectors based on their Expected Tail Loss (ETL), which evaluates each sector’s vulnerability during periods of market turbulence and its respective contribution to the overall sector’s risk level.
2. Applying Principles-Based Tilt - Each sector’s risk-weighted baseline weighting is systematically tilted to underweight or overweight exposure to reflect the principles-based factors related to public policy environment and demographic characteristics. Guardrails are also used to confirm the allocations of non- core sectors.
3. Corporate Issuer Selection - Within the U.S. Corporate Investment Grade and High Yield selection universe of bonds, a liquidity and credit quality screen is applied to all issues to ensure the tradability of the IG and HY sectors. The process then systematically ranks the issuers based on the Aggregated Credit Risk Score within their respective Industry Group, where issuers are classified as belonging to Insurance, Bank & Financials and All Others. Issuers with low relative scores within each Industry Group are removed from the selection pools, resulting in an approved corporate issuer list from which to select.
4. Bond Issue Selection - In order for an issue to be eligible for its respective bond sector, it must have positive convexity and a duration within 3 years of that sector’s effective duration*. For each issuer, the eligible issues are ranked by yield to worst (“YTW”) and distance to target duration. For each non- corporate sector, the top-ranked thirty issues are selected as constituents of the Index. For each of the corporate sectors, the top-ranked 200 issuers for IG and 100 issuers for HY are selected as constituents of the Index.
Each corporate sector’s selected issues are divided into quartiles based on their Aggregated Credit Risk Score, and a systematic tilt is then applied to quartiles with better scores.
Within each quartile, the underlying issues are then systematically tilted toward issues with higher YTW and distance to target duration rankings.
For non-corporate sectors, the weighting of each selected issue is systematically tilted based on its YTW and distance to target duration ranking.