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A Conscientious Cash Alternative - iBoxx MSCI ESG Liquid Investment Grade Ultrashort Indices

20 March 2020 Nicholas Godec, CFA

The iBoxx MSCI ESG Liquid Investment Grade Ultrashort Indices provide investors with a tradable measure of ultrashort duration corporate bonds that are screened to include issuers that meet Environmental, Social and Governance standards.

You can think of the iBoxx Ultrashort Indices as tracking cash equivalent-plus securities in that they are on the spectrum between traditional money markets and core bond holdings. The indices include high quality, investment grade corporate bonds that yield more than traditional money market holdings, while also including bonds with maturities beyond 90 days out. The iBoxx Ultrashort Indices include fixed rate bonds with under one year to maturity and floating rate bonds with under three years to maturity.

The iBoxx MSCI ESG Ultrashort indices compliment the overall iBoxx Ultrashort family by providing an ESG investing framework for ESG conscious investors. The iBoxx MSCI ESG Liquid Investment Grade Ultrashort Indices mitigate ESG risk by screening out issuers from the iBoxx Liquid Investment Grade Ultrashort Indices that are involved in weapons, firearms, tobacco, adult entertainment, alcohol, gambling nuclear power, genetically modified organisms, fossil fuel and violators of the UN Global Compact. Firms with significant controversies related to their social and environmental impact are also excluded, as are firms with an MSCI ESG Rating of BB or below.

The iBoxx MSCI ESG Liquid Investment Grade Ultrashort indices include the iBoxx MSCI ESG USD Liquid Investment Grade Ultrashort, iBoxx MSCI ESG EUR Liquid Investment Grade Ultrashort and iBoxx MSCI ESG GBP Liquid Investment Grade Ultrashort Indices. Detailed rules can be found on our iBoxx Documentation page.

Cash Equivalent Plus

The cash equivalent-plus feature of the ESG Ultrashort Indices can be observed in yields and durations above cash in their respective currencies, yet well below core bond holdings (Figure 1, Figure 2). As of February 29, the annual yield of the ESG Ultrashort indices in USD, EUR and GBP were 1.44%, -0.07% and 0.76%, respectively. The effective durations in USD, EUR and GBP were 0.72, 0.82 and 1.18.


Figure1: Annual Yield - July 31, 2013 to February 29, 2020


Figure2: Effective Duration - July 31, 2013 to February 29, 2020


Ultrashort Risk-Return Profiles

The risk-return profiles of the ESG and non-ESG Ultrashort indices are near identical, providing an ESG option to ESG-minded investors who aren't willing to sacrifice performance (Table 1, Table 2, Table 3). Whether ESG or non-ESG, the Ultrashort indices exhibit extremely low volatility, with historical annual vols less than 0.20% for all currencies.

Table1: USD Ultrashort Performance - July 31, 2013 to February 29, 2020

iBoxx MSCI ESG USD LQ IG Ultrashort

Markit iBoxx USD LQ IG Ultrashort

Vol

0.186%

0.195%

Annualized Return

1.420%

1.458%

Sharpe (0 rates)

7.64

7.49

Max Drawdown

-0.133%

-0.134%

Max Drawdown Date

8/1/2013

8/1/2013

Table2: EUR Ultrashort Performance - July 31, 2013 to February 29, 2020

iBoxx MSCI ESG EUR LQ IG Ultrashort

Markit iBoxx EUR LQ IG Ultrashort

Vol

0.183%

0.180%

Annualized Return

0.098%

0.141%

Sharpe (0 rates)

0.534

0.785

Max Drawdown

-0.539%

-0.550%

Max Drawdown Date

1/10/2019

1/10/2019

Table3: GBP Ultrashort Performance - July 31, 2013 to February 29, 2020

iBoxx MSCI ESG GBP LQ IG Ultrashort

Markit iBoxx GBP LQ IG Ultrashort

Vol

0.172%

0.169%

Annualized Return

0.801%

0.813%

Sharpe (0 rates)

4.65

4.81

Max Drawdown

-0.102%

-0.094%

Max Drawdown Date

8/2/2013

8/2/2013




Ultrashort Sector Breakdown

The sector exposures are close between the ESG and non-ESG Ultrashort indices, indicating that issuers with specific ESG risks rather than industries are filtered out. However, slight sector differences exist, with Financials and Technology having greater weightings within the ESG Ultrashort Indices across currencies.

As of February 29, 2020, in USD and EUR, Financials was the greatest sector mismatch (+4.45% and +9.98% ESG versus non-ESG, respectively) (Figure 3, Figure 4). The GBP Ultrashort indices also include sub-sovereigns and covered bonds, however the total weight from non-corporate sectors in the index was only 5.44%. The largest sector mismatch in GBP was in Covered bonds (+2.88% ESG versus non-ESG) (Figure 5).


Figure3: USD Ultrashort Sector Comparison - February 29, 2020


Figure4: EUR Ultrashort Sector Comparison - February 29, 2020


Figure5:GBP Ultrashort Sector Comparison - February 29, 2020


Conclusion

The iBoxx MSCI ESG Liquid Investment Grade Ultrashort Indices provide an investible measure of the space between cash equivalents and core bond holdings. The ultrashort duration exposure and high credit quality significantly limits interest rate and credit risks, respectively. The MSCI ESG screening process limits ESG risks by removing firms that fail to meet ESG criteria. The result is a portfolio, or sleeve to a broader portfolio, that is low in volatility and high in conscientiousness.

Posted 20 March 2020 by Nicholas Godec, CFA, Index Product Manager, Tradable Indices, IHS Markit

IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.


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