Among the new fixed income exchange traded funds to have come to market this year, the VanEck Vectors Green Bond ETF (NYSEArca: GRNB) is the only one dedicated to socially responsible investment theme.
Green bonds are debt securities issued to finance projects that promote climate change mitigation or adaptation or other environmental sustainability purposes. The new breed of green bonds 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, according to a note.
GRNB tries to reflect the performance of the S&P Green Bond Select Index, which is comprised of debt issued for qualified “green” purposes.
“Green bonds are an emerging asset class which is ultimately fuelled by the increasing determination of governments to lower global carbon emissions in order to limit climate change,” said Fitch Ratings in a recent note. “The European Union has been a driving force in establishing the market, linked to its Renewable Energy Directive enacted in 2009. The green bond market has grown rapidly to become a global asset class for all sectors, boosted by the UN COP 21 climate agreement in December 2015. Global policy makers see green bonds as a key tool to implement national climate change targets.”
GRNB, which debuted in March, has $5.1 million in assets under management and a 30-day SEC yield of almost 1.1%. The ETF holds 41 green bonds. Most of GRNB’s holdings, about 93% of which are rated investment-grade, have maturities ranging from one year to 10 years.
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.
“For issuers, the green bond market provides an opportunity to diversify funding sources,” adds Fitch. “The rarity of green bonds and the dominance of dedicated buy-and-hold investors focused on the sustainable and responsible segment sometimes drive pricing tighter than for comparable instruments by the same issuer. Issuing green bonds can be seen by investors as an indication that the issuer is cognisant of environmental matters which could affect their business in the longer term.”
Green bonds also often feature low correlations to other fixed income assets, a possible advantage for income investors at a time of diverging monetary policies throughout much of the developed world.
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