The universe of environmental, social, and governance (ESG) fixed income exchange traded funds is expanding, and while bonds are currently out of fashion due to interest rate tightening by the Federal Reserve, it could be an ideal time for investor to build watchlists of ESG bond ETFs.
One fund worthy of that consideration is the IQ MacKay ESG Core Plus Bond ETF (ESGB). ESGB, which recently turned a year old, is actively managed. That’s a plus at a time of interest rate duress, but it could be beneficial for ESG-focused investors because traditional aggregate bond strategies don’t make intentional ESG efforts.
ESGB is also pertinent at a time when more companies and governments are committing to net-zero goals and as more investors are scrutinizing exactly how funds are credibly addressing the renewable energy transition.
“Navigating the transition in a portfolio requires taking a view on: 1) how fast the transition will be; 2) how to mitigate for volatility and possible supply constraints along the way; and 3) the extent to which the transition path is already reflected in market pricing,” according to BlackRock research.
Obviously, many bond investors are looking to avoid volatility. Perhaps coincidentally, bonds — both corporates and sovereigns — with favorable ESG traits are often less volatile than counterparts that could be vulnerable to ESG controversies.
On that note, ESGB is a highly relevant consideration because its managers focus on “eliminating uncompensated risk,” according to the issuer.
“Those companies that are better prepared and more able to benefit should be perceived as lower risk and could enjoy a lower cost of capital. Their future expected cashflows may be valued more highly. That would mean, all else equal, the prices of those assets should go up. That effect is reinforced as investor preferences shift towards greener assets. As the repricing unfolds, owners of those assets could potentially earn higher returns than they would otherwise,” added BlackRock.
Owing to a Treasury-heavy portfolio, credit risk is minimal with ESGB, as the fund allocates about 58% of its weight to bonds rated AAA, AA, or A. ESGB sports a 30-day SEC yield of 3.80%, according to issuer data. That’s confirmation that income investors need not sacrifice income in an effort to pair ESG principles with bonds. An annual fee of 0.39%, or $39 on a $10,000 investment, is also favorable among active fixed income ESG strategies.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.