While riskier than U.S. government debt, investors are still eyeing corporate debt. Considering that yields for investment-grade corporate bonds are at 5.7%, the highest in more than a decade, that’s not surprising. Plus, despite the possibility of a recession looming over the horizon, defaults on IG corporate bonds are extremely rare.
In particular, fixed income funds with an environmental, social, and governance (ESG) focus are drawing in investor capital. Fixed income funds deemed ESG-focused by Morningstar saw greater net inflows than equity funds in 2022 for the first time.
The momentum is expected to grow. Barclays has forecasted that global sales of corporate bonds with ESG targets will top $460 billion this year, up from $362 billion in 2022, according to a report from Reuters. Global ESG assets are on track to hit $50 trillion by 2025, according to Bloomberg.
For ESG-focused fixed income investors seeking yield and willing to go out a little further on the risk curve, the Vanguard ESG U.S. Corporate Bond ETF (VCEB) may be worth looking into. VCEB seeks to track the performance of the Bloomberg MSCI U.S. Corporate SRI Select Index, which includes U.S. dollar-denominated, investment-grade, fixed-rate, taxable bonds with maturities of greater than one year.
To be included in the index, securities are screened for certain ESG criteria. VCEB specifically excludes bonds of companies that engage in adult entertainment, alcohol, gambling, tobacco, nuclear weapons, controversial weapons, conventional weapons, civilian firearms, nuclear power, and thermal coal, oil, or gas.
Additionally, the index also excludes bonds of companies that do not meet certain standards defined by the index sponsor with respect to an ESG controversies assessment, as well as companies that do not meet certain diversity criteria. VCEB carries an expense ratio of 0.12% and has a 30-day SEC yield of 5.18%, as of March 2.
Speaking at Exchange: An ETF Experience, Vanguard CEO Tim Buckley said that the asset manager’s goal is “to make sure we’re producing the top-performing funds and ETFs out there.”
“We’ll wrap it with low-cost, scalable advice and deliver them on a world-class, digitally enabled platform,” he added. “And if you do that well and you can keep improving it, you’ll create value into the future.”
For more news, information, and analysis, visit the Fixed Income Channel.