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Index Replication Process


Lyxor UCITS ETFs follow both physical and synthetic index replication process.


However, most Lyxor UCITS ETFs follow synthetic replication process. This consists of entering into a derivative transaction (a ‘Performance Swap’, as defined below) with a counterparty that provides complete and effective exposure to its benchmark index. Lyxor has adopted this methodology in order to minimise tracking error, optimise transaction costs and reduce operational risks.


A Performance Swap is a contractual agreement which is negotiated over-the-counter (OTC) between two parties: the Lyxor UCITS ETF and its counterparty. From a risk perspective, each Performance Swap ranks equally with other senior unsecured obligations of the counterparty, such as common bonds (i.e., same rights to payments). In the Performance Swap, the counterparty of the Lyxor UCITS ETF commits to pay the Lyxor UCITS ETF a variable return based on a pre-determined benchmark index, instead of a fixed stream of income (as in bonds). At the same time, the counterparty will receive from the Lyxor UCITS ETF the performance and any related revenues generated by the basket's assets (excluding the value of the Performance Swap) held by the Lyxor UCITS ETF. Information provided on individual ETFs includes data on the basket relating to the ETF and the percentage value of the basket represented by each asset. The information is relevant to the closing values on the date given. 


Investment Risks


The Lyxor UCITS ETFs described on this website are not suitable for everyone. Investors' capital is at risk. Investors should not deal in this product unless they understand, having obtained independent professional advice where necessary, its nature, terms and conditions, and the extent of their exposure to risk. The value of the product can go down as well as up and can be subject to volatility due to factors such as price changes in the underlying instrument and interest rates. If a fund is quoted in a different currency to the index, currency risks exist.


Prior to any investment in any Lyxor UCITS ETF, you should make your own appraisal of the risks from a financial, legal and tax perspective, without relying exclusively on the information provided by us. We recommend that you consult your own independent professional advisors (including legal, tax, financial or accounting advisors, as appropriate).


Specific Risks


·         Capital at Risk. ETFs are tracking instruments: Their risk profile is similar to a direct investment in the Benchmark Index. Investors’ capital is fully at risk and investors may not get back the amount originally invested. Investments are not covered by the provisions of the Financial Services Compensation Scheme (“FSCS”), or any similar scheme.

·         Counterparty Risk. Investors may be exposed to risks resulting from the use of an OTC Swap with Societe Generale. Physical ETFs may have Counterparty Risk resulting from the use of a Securities Lending Programme.

·         Currency Risk. ETFs may be exposed to currency risk if the ETF or Benchmark Index holdings are denominated in a currency different to that of the Benchmark Index they are tracking. This means that exchange rate fluctuations could have a negative or positive effect on returns.

·         Replication Risk. ETFs are designed to replicate the performance of the Benchmark Index. Unexpected events relating to the constituents of the Benchmark Index may impact the Index provider’s ability to calculate the Benchmark Index, which may affect the ETF’s ability to replicate the Benchmark Index efficiently. This may create Tracking Error in the ETF.

·         Underlying Risk. The Benchmark Index of a Lyxor ETF may be complex and volatile. When investing in commodities, the Benchmark Index is calculated with reference to commodity futures contracts which can expose investors to risks related to the cost of carry and transportation. ETFs exposed to Emerging Markets carry a greater risk of potential loss than investment in Developed Markets as they are exposed to a wide range of unpredictable Emerging Market risks.

·         Liquidity Risk. On-exchange liquidity may be limited as a result of a suspension in the underlying market represented by the Benchmark Index tracked by the ETF; a failure in the systems of one of the relevant stock exchanges, Societe Generale or other Market Maker systems; or an abnormal trading situation or event.


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03 May 2021

ESG credit: A simple switch for ‘best in class’ bonds 

For bond investors, success is defined less by picking winners than by avoiding losers. Integrating ESG considerations into a bond portfolio can help with this challenge, reducing risk and potentially improving returns. In this blog, we will examine how an environmental, social, and governance (ESG) filter can improve the quality of corporate bonds in a portfolio, and how this can help secure future income and reduce default risk. 

In our last article (Financing the future: how bond markets can help build a better world) we talked about ‘sustainable bonds’ and briefly outlined two types that can contribute to positive ESG or climate outcomes. One is green bonds, and the other – which we will look at in greater detail today – is ESG-screened corporate bonds (‘ESG credit’).

What is ESG credit?

ESG credit takes a mainstream corporate bond benchmark (the ‘parent index’) and applies a sustainability screen that includes extra environmental, social, and governance (ESG) standards. This screen or filter excludes any bonds issued by companies with poor ESG ratings, or who are subject to very severe scandals, or involved in controversial business such as weapons, tobacco, thermal coal and unconventional oil and gas.  

The power of corporate bonds 

Issuing corporate bonds is one of the main ways that the world’s companies raise money. Through the bond market, corporations raise billions of euros each year to finance their business and grow. To reward investors for providing these loans, the issuer provides a regular payment (the coupon) and returns the investor’s loan (the principal) when the bond matures. 

Most companies need credit to scale up and innovate with new products and markets. They regularly return to the corporate bond market to issue new bonds, which helps explain why this market makes up about one third (€34trn) of the €100trn bond universe1

Given the large sums involved, and the fact that companies must regularly approach the market for more, bond investors have huge power to change corporate behaviour. And, as we’ll see now, better corporate behaviour is good news for bond investors who want to improve long-term returns.

Why bond investors should care about ESG too

Unlike equity investors, bond investors aren’t driven by the need to pick outperformers. Their priority is more to avoid losers, receive their initial investment back, and benefit from the regular income promised by the issuer in the meantime. 

The question is then: what could stop the issuer providing this income? Or in other words, what major risks are there to corporations’ future cashflows? What could, in the worst case, make them default on their debt entirely? 

In our view looking at long-term risks, some of the main issues nowadays are encapsulated within the three letters ‘ESG’. Whether it’s how a company adapts (or doesn’t) to environmental issues, how it manages social responsibility, or conducts its corporate governance, it all hinges on ESG. If you’re a bond investor, you want to make sure that your bond issuers aren’t sleepwalking into disaster. Given the capped upside of bonds compared to equities, a default can be devastating for performance. 

ESG credit funds address this problem by taking into account extra-financial ESG criteria, aiming to build a ‘best in class’ corporate bond exposure that could help reduce the risk of major scandals or corporate mismanagement affecting bond performance. Our ESG credit ETFs exclude all companies involved in serious controversies, as these can become progressively more dangerous to corporate financial stability (a controversy which leads to major fines can, in turn, cause bankruptcy). 

The best part is that ESG indices can deliver risk/return benefits with a high correlation and low tracking error to non-ESG indices. That makes it very simple to switch a bond allocation to ESG. 

What took so long? 

At the start of the ‘ESG shift’, investors mostly applied sustainability analysis to equities. There are several reasons why, including the perception that bond investors have less power to engage with companies and influence change, as they are lenders rather than co-owners.

With equities, the thinking went, an investor could vote at shareholder meetings and influence the behaviour of companies to encourage them towards more sustainable business practices.

Not to mention that executive pay is often linked to stock price performance, so moving a company’s stock price can exert extra influence on senior management.

However, in terms of market value, the bond market is far larger than the equity one2.  And ESG scores that provide important benefits to equities – often leading to better risk/return and positive impact – can be applied to corporate bonds too. 

That’s why institutions like the UN PRI have emphasised that responsible investors should apply ESG across asset classes – not just focus on equities.

This has led investors to understand that an ESG strategy implemented through equities alone addresses just one part of the challenge – and it doesn’t fully satisfy a goal to be responsible and ESG-focused. So, with the success of ESG equity investing well established, investors are now striving to replicate that success with bonds.

How investors started the ‘ESG shift’

ESG isn’t new, but 2020 was undoubtedly a turning point for sustainable investing. Over $120bn in net new assets went into sustainable funds in Q4 2020, according to Morningstar data. Flows across the whole of 2020 were “almost five times higher than three years ago.” 

European Sustainable Fund Flows by Asset Class (Morningstar data)

Morningstar flows chart

Source: Morningstar Direct, Morningstar Research. Data as of December 2020. 

As an exchange-traded fund (ETF) provider, we look more closely at ETFs. In Europe last year, ESG ETFs gathered more than half of all ETF flows, gaining €45.5bn compared to €43.8bn for non-ESG ETFs. ESG ETF flows in 2020 were more than double the figure in 2019. 

Page 3 - ETF flows chart

Looking specifically at bond ETFs, we’ve seen steady flows into ESG bond ETFs since the start of 2020, even through the height of the Covid crisis in March 2020. 

Flows into ESG and non-ESG fixed income ETFs, January 2020 – March 2021

In millions (USD) 

Page 4 - Fixed income flows chart

Source: Lyxor International Asset Management, as at 21/04/2021. 

To recap: at the beginning of this article, we explained our view that there’s a strong case for bringing ESG considerations into bond allocations – and that doing so is a central part of being a truly responsible investor. In the section above, we’ve seen that the ‘ESG shift’ is now well underway. Next, let’s look at one way to integrate ESG into a bond allocation. 

ESG credit: Lyxor’s approach

We are one of Europe’s leading ETF providers with a long-standing focus on ESG, climate, and thematic investing. We believe in the power of ETFs to democratise investing and put low-cost, effective investment solutions in the hands of anyone who needs them. 

Our approach to building ESG credit ETFs uses three layers of ESG screening applied to Bloomberg Barclays bond indices. We start with a parent index – for example, the Bloomberg Barclays Euro Corporate Bond Index. We apply a liquidity filter, then the following exclusions: 

Page 4 - ESG rating icon

Issuers with no ESG rating or a low ESG rating are excluded based on MSCI ESG Ratings done at peer-group level (see ‘MSCI ESG Ratings’ table below). Issuers rated with ESG rating below BBB and non-rated issuers are excluded. 

Page 4 - Controversial businesses icon

Issuers involved in controversial businesses are excluded using a revenue-based approach. This is based on MSCI ESG Business Involvement Screening Research and additional fossil fuel-related filters3.

Page 4 - Controversial businesses icon

Finally, issuers subject to severe controversies are excluded based on the MSCI ESG Controversies Score, where any companies subject to major controversies classified as “Red” are excluded.  

Understanding the ESG screening methodology

Page 5 - MSCI ESG ratings diagram

The full ESG screening process

Page 5 - ESG screening flow diagram

Reasons to consider switching from non-ESG to ESG credit

1. Recent history shows ‘ESG leaders’ are better in a crisis

Top ESG issuers fared better during the March 2020 market volatility…
Period: 28/02/2020 – 31/03/2020, perf in USD

Page 6 - ESG buckets performance chart

Source: Lyxor International Asset Management, Bloomberg Barclays, MSCI. USD corporate universe performance of each ESG bucket relative to Bloomberg Barclays US Corp Index. For illustrative purposes only. Past performance does not predict future performance. Data as of 31/03/2021. ESG rating considered as of 28/02/2020. 

… and ESG credit offers more exposure to top ESG issuers
Euro investment grade corporate bonds - ESG rating breakdown vs parent index

Page 6 - Investment grade ESG ratings

Euro high yield corporate bonds - ESG rating breakdown vs parent index

Page 6 - High yield ESG ratings

Source for both charts: Lyxor International Asset Management, Bloomberg Barclays, MSCI. For illustrative purposes only. Data as at 01/03/2021. 

2. Better credit rating compared to parent indices

Euro investment grade (IG) corporate bonds - Credit rating breakdown vs parent index (% market value) 

Page 7 - Investment grade Credit Ratings

Euro high yield (HY) corporate bonds - Credit rating breakdown vs parent index (% market value) 

Page 7 - High yield Credit Ratings

Source for both charts: Lyxor International Asset Management, Bloomberg Barclays, MSCI. For illustrative purposes only. Data as at 01/03/2021. 

3. No major biases compared to parent indices

Euro investment grade (IG) corporate bonds - Similar yield and duration profile vs parent index

Page 8 - Investment grade Profile Comparison

Euro high yield (HY) corporate bonds - Similar yield and duration profile vs parent index

Page 8 - High yield Profile Comparison

Source for both tables: Lyxor International Asset Management, Bloomberg Barclays, MSCI. For illustrative purposes only. Data as at 01/03/2021.

Our ESG credit ETFs at a glance 

This has been a quick introduction to the case for ESG investing in corporate bonds. We believe that ESG credit is the natural choice for responsible investors and the next logical step for ESG investing. A new generation of indices and ETFs makes this change as easy as a simple switch. Please get in touch if you’d like to learn more, or visit our ESG Hub to explore Lyxor’s SFDR 8 compliant* ESG credit range. 

Source: Lyxor International Asset Management, 28/04/2021. 

Webcast with Bloomberg, 25 May – you’re invited 

Register now for our upcoming webcast with Bloomberg on 25 May, “Why switching to ESG corporate bonds is a natural choice”. You will hear from Mahesh Bhimalingam, Chief European Credit Strategist for Bloomberg Intelligence for a credit market outlook, and David Mendez-Vives, Senior Quantative Analyst at Bloomberg for insight on the application of ESG to corporate bond indices.
If you’d like to learn more about these exciting topics, please book a spot

*SFDR: Sustainable Finance Disclosure Regulation.

This article is for informative purposes only, and should not be taken as investment advice. Lyxor ETF does not in any way endorse or promote the companies mentioned in this article. Capital at risk. Please read our Risk Warning below.

1Source: ICMA, August 2020 USD conversion to EUR calculated on 27/04/2021. 

2Global bond market ($128.3 trillion) ICMA, global equity market ($109 trillion) World Federation of Exchanges

3Controversial businesses include: Alcohol, Tobacco, Gambling, Adult entertainment, GMOs, Nuclear power, Civilian firearms, Military weapons, Thermal coal, Unconventional Oil & Gas. Source: Lyxor International Asset Management, Bloomberg Barclays, MSCI, as of April 2021. For illustrative purposes only. 

Risk Warning
This document is for the exclusive use of investors acting on their own account and categorised either as “Eligible Counterparties” or “Professional Clients” within the meaning of Markets in Financial Instruments Directive 2014/65/EU. These products comply with the UCITS Directive (2009/65/EC). Société Générale and Lyxor International Asset Management (LIAM) recommend that investors read carefully the “investment risks” section of the product’s documentation (prospectus and KIID). The prospectus and KIID are available free of charge on, and upon request to
Except for the United-Kingdom, where this communication is issued in the UK by Lyxor Asset Management UK LLP, which is authorized and regulated by the Financial Conduct Authority in the UK under Registration Number 435658, this communication is issued by Lyxor International Asset Management (LIAM), a French management company authorized by the Autorité des marchés financiers and placed under the regulations of the UCITS (2014/91/EU) and AIFM (2011/61/EU) Directives. Société Générale is a French credit institution (bank) authorised by the Autorité de contrôle prudentiel et de résolution (the French Prudential Control Authority). Lyxor International Asset Management (LIAM) is registered in the public register of the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten) as a manager (beheerder) of a UCITS. 
The products mentioned are the object of market-making contracts, the purpose of which is to ensure the liquidity of the products on the London Stock Exchange, assuming normal market conditions and normally functioning computer systems. Units of a specific UCITS ETF managed by an asset manager and purchased on the secondary market cannot usually be sold directly back to the asset manager itself. Investors must buy and sell units on a secondary market with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current net asset value when buying units and may receive less than the current net asset value when selling them. Updated composition of the product’s investment portfolio is available on In addition, the indicative net asset value is published on the Reuters and Bloomberg pages of the product, and might also be mentioned on the websites of the stock exchanges where the product is listed.
Prior to investing in the product, investors should seek independent financial, tax, accounting and legal advice. It is each investor’s responsibility to ascertain that it is authorised to subscribe, or invest into this product. This document is of a commercial nature and not of a regulatory nature. This material is of a commercial nature and not a regulatory nature. This document does not constitute an offer, or an invitation to make an offer, from Société Générale, Lyxor Asset Management (together with its affiliates, Lyxor AM) or any of their respective subsidiaries to purchase or sell the product referred to herein.
Research disclaimer
Lyxor International Asset Management (“LIAM”) or its employees may have or maintain business relationships with companies covered in its research reports. As a result, investors should be aware that LIAM and its employees may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see appendix at the end of this report for the analyst(s) certification(s), important disclosures and disclaimers. Alternatively, visit our global research disclosure website
Conflicts of interest
This research contains the views, opinions and recommendations of Lyxor International Asset Management (“LIAM”) Cross Asset and ETF research analysts and/or strategists. To the extent that this research contains trade ideas based on macro views of economic market conditions or relative value, it may differ from the fundamental Cross Asset and ETF Research opinions and recommendations contained in Cross Asset and ETF Research sector or company research reports and from the views and opinions of other departments of LIAM and its affiliates. Lyxor Cross Asset and ETF research analysts and/or strategists routinely consult with LIAM sales and portfolio management personnel regarding market information including, but not limited to, pricing, spread levels and trading activity of ETFs tracking equity, fixed income and commodity indices. Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) views and reports. Lyxor has mandatory research policies and procedures that are reasonably designed to (i) ensure that purported facts in research reports are based on reliable information and (ii) to prevent improper selective or tiered dissemination of research reports. In addition, research analysts receive compensation based, in part, on the quality and accuracy of their analysis, client feedback, competitive factors and LIAM’s total revenues including revenues from management fees and investment advisory fees and distribution fees.

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