Deutsche Launches Subordinated Corporate Bond ETF

Deutsche Asset & Wealth Management, the world’s fifth-largest ETF issuer, will introduce the db X-trackers Solactive Investment Grade Subordinated Debt Fund (NYSEArca: SUBD) today, the issuer’s second new ETF introduction in as many days.

SUBD will track the Solactive Subordinated Bond Index, which provides exposure to the dollar-denominated investment-grade subordinated corporate bond market. Subordinated loans rank below more senior corporate credit fare, meaning that in the event of default, holders of subordinated debt are compensated after investors owning lower-yielding bonds.

“Most issuers of subordinated debt belong to the following sectors: Media & Publishing, Consumer Industries, Capital Industries, Transportation and Technology — Issues are rarer amongst Banking & Financial Institutions and Utilities. The vast majority of issuers of subordinated debts are companies rated BBB/BAA or above. Finally, recoveries on subordinated debt are only around 8%-10% lower than on senior unsecured debt, on average, based on Moody’s data,” according to Deutsche Asset & Wealth Management.

As of April, the Solactive Subordinated Bond Index was comprised of 137 constituents representing 70 parent companies with a combined $169 billion outstanding, according to Solactive. Index constituents have an average duration of 7.27 years and an average yield to maturity of 4.04%.

The index universe is made of all dollar-denominated corporate bonds classified as subordinated or junior subordinated, with a minimum time to maturity of at least 1 year and an amount outstanding greater than or equal to $500 million. To be eligible in the index, bonds must be rated BBB/Baa2 or above. A maximum of five bonds per parent company is allowed. Each index component is weighted according to market value, said Solactive.

SUBD will charge 0.45% per year, which is below the fees charged by some of the largest high-yield and senior loan ETFs.