Key Morningstar Metrics for UBS BBG MSCI Euro Area Liquid Corp Sustainable UCITS ETF CBSE
- : NeutralMorningstar Medalist Rating
- : Below AverageProcess Pillar
- : Above AveragePeople Pillar
- : AverageParent Pillar
UBS BBG MSCI Euro Area Liquid Corp Sustainable ETF restricts coverage to companies domiciled in the euro area. By contrast, the bulk of funds in this Morningstar Category, passive and active, do not apply such a restriction. This makes the fund an outlier. The narrow geographical bias means the index excludes a sizable part of the available opportunity set. This makes its risk/return profile more uncertain relative to the average peer in the category, meaning that investors in this fund will have to stomach higher tracking error relative to the broader universe.
The environmental, social, and governance screening employed by the index—updated to comply with the ESMA naming regulations—provides assurances to ESG-conscious investors. Meanwhile, the high liquidity requirements of the index make the portfolio somewhat biased to large-cap issuers. Also, there is a slight quality bias to the portfolio in terms of credit ratings, which is typical of ESG-focused bond funds. This may make the fund lag a bit relative to the broad universe during risk-on phases but should provide a cushion in downturns.
The compounding benefits of low fees will support returns over the long term, but ultimately this is a market where experienced active managers may add value, for example via targeted sector and company calls or by modulating duration. Also, managers with the flexibility to dial up credit risk may venture into high-yield territory to prop up returns while keeping the environmental, social, and governance credentials of the mandate in check. They can also tilt to semigovernment holdings to increase quality at times of stress. This is something that a passive fund cannot do.
Overall, the restrictions in terms of the domicile of the issuers and the high bar in terms of liquidity deliver a portfolio with substantial biases in terms of sector relative to the broad universe. Ultimately, this limits our conviction in the merits of the strategy.
UBS BBG MSCI Euro Area Liquid Corp Sustainable UCITS ETF: Performance Highlights
The biases of this fund deliver a different risk/return profile than the typical ESG passive fund in the category. What does not change relative to other passive peers, whether mainstream or ESG, is that this is a 100% corporate bond portfolio, whereas the average peer in this category is active and typically straddles agency and collateralized bond territory to cushion risk or even looks to high-yield to prop up returns at more favorable times.
The purity of the exposure and the geographical and liquidity restrictions of the index can play for or against the fund, depending on overall market conditions. Besides, buying into an ESG proposition means that investors are exposed to some sector biases.
The compounding benefits of low fees will provide a nice tailwind to returns, but ultimately, this is a market exposure where experienced active managers may add value via targeted duration, sector, or company calls.
