Environmentally conscientious investors who want to both realize their investment objective and still make a positive impact on mother nature can look to a recently launched green bond exchange traded fund that specifically targets issuers with sound environmental, social and governance principles.
“Given the market’s significant growth in the past five years, green bonds are attracting interest not only from environmental, social, and governance (ESG) focused investors but from traditional fixed income investors who previously did not have an efficient way to ‘green’ their portfolios,” William Sokol, Product Manager of ETFs at VanEck, said in a note.
With green bonds, traditional fixed-income investors do not need to sacrifice much as this new breed of debt securities are very closely and highly correlated to conventional bonds, providing income and relative safety, compared to other riskier assets.
First off, green bonds are debt securities issued to finance major projects that promote climate change mitigation, instigate adaptation or affect other environmental sustainability purposes. The green bond segment gained momentum in global market ever since the European Investment Bank issued the first green bond in 2007, with $81 billion in green bonds issued in 2016 and an expected $150 billion to be issued in 2017.
“Green bonds, in short, are simply conventional bonds with an environmentally friendly use of proceeds,” Sokol said.
Fixed-income investors don’t have to give up on their current market exposure to include green bonds into a diversified bond portfolio. The overall market for green bonds closely resembles a core global fixed-income benchmark, providing similar yield, duration and credit quality.
For instance, the VanEck Vectors Green Bond ETF (NYSEArca: GRNB), the first green bond-related ETF to come to market, shows a yield to worst of 1.48%, a 6.33 year effective duration and a portfolio of investment-grade debt, including AAA 31.2%, AA 16.7%, A 28.6% and BBB 14.4%.
“This is a theme that resonates with all types of investors,” Sokol told ETF Trends in a call. “The debt securities are like conventional bonds, but with a green kicker.”
Moreover, given GRNB’s international scope, Sokol argued that the ETF may be a suitable core portfolio alternative to the widely observed Bloomberg Barclays Global Aggregate Bond Index.
“Investors can, therefore, allocate a portion of their global bond allocation to green bonds without significantly altering the risk and return profile of their portfolio,” Sokol said. “In other words, bond investors can structure a more environmentally aware portfolio without having to compromise on their investment goals.”
The green bond market represents the investable global green bond market and includes all issuer types, excluding tax-exempt U.S. munis, across countries and currencies, reflecting a portfolio of high quality, core global bond allocations. Moreover, green bonds have shown low historical correlation to broad U.S. fixed income markets, which may provide further diversification benefits to a U.S.-centric bond portfolio.
Nevertheless, green bonds still come with the usual risks, such as interest rate risk and foreign currency risks.