As the energy sector continues to trounce other sectors in 2022, a portfolio of corporate bonds with reduced energy sector exposure seems less than ideal. However, year-to-date, investors have bucked the trend to put net millions into ESG bond ETFs.
| ESG Ticker | ESG Fund Name | YTD Flows* ($, mm) | TTM Yield | Non-ESG Ticker | Non-ESG Fund Name | YTD Flows* ($, mm) | TTM Yield |
| EAGG | iShares ESG Aware US Aggregate Bond ETF | 407.84 | 1.33% | AGG | iShares Core U.S. Aggregate Bond ETF | -660.72 | 2.19% |
| ELQD | iShares ESG Advanced Investment Grade Corporate Bond ETF | 0 | 1.43% | LQD | iShares iBoxx USD Investment Grade Corporate Bond ETF | -2,179.09 | 2.75% |
| EUSB | iShares ESG Advanced Total USD Bond Market ETF | 264.54 | 1.49% | AGG | iShares Core U.S. Aggregate Bond ETF | -660.72 | 2.19% |
| HYXF | iShares ESG Advanced High Yield Corporate Bond ETF | 28.64 | 5.42% | HYG | iShares iBoxx USD High Yield Corporate Bond ETF | -5,272.29 | 4.73% |
| NUBD | Nuveen ESG U.S. Aggregate Bond ETF | 11.95 | 2.33% | NUAG | Nuveen Enhanced Yield U.S. Aggregate Bond ETF | -138.33 | 2.36% |
| SUSB | iShares ESG Aware 1-5 Year USD Corporate Bond ETF | -50.49 | 1.42% | IGSB | iShares 1-5 Year Investment Grade Corporate Bond ETF | -351.04 | 1.82% |
| SUSC | iShares ESG Aware USD Corporate Bond ETF | 161.81 | 2.69% | LQD | iShares iBoxx USD Investment Grade Corporate Bond ETF | -2,179.09 | 2.75% |
| VCEB | Vanguard ESG U.S. Corporate Bond ETF | 61.06 | 2.19% | VTC | Vanguard Total Corporate Bond | -45.81 | 2.77% |
*Flows data as of 6/24/2022. Data courtesy FactSet
ESG versions of fixed income ETFs among BlackRock, Vanguard, and Nuveen have added a net $888 million this year, compared to $9 billion of outflows for non-ESG funds that follow a parent index or have the same benchmark, according to a VettaFi analysis.
Even Vanguard’s ESG bond offering is outpacing the firm’s ETF giving exposure to all three lengths to maturity in the corporate bond space, although VTC is a fund of funds and doesn’t directly hold securities.
This comes despite the fact that the ESG versions of these funds are generally higher in expenses and underperform their sister ETFs by a rate between eight basis points to a full percentage point when comparing total return. With the exception of HYXF, the ESG bond fund yields are trailing their non-ESG counterparts over the last 12 months.
The rate of outflows in established non-ESG funds like AGG, HYG, and LQD is explained in part by their roles as trading tools due to their existing size and liquidity. Take the $1.93 billion EAGG, whose assets are just barely 2% of the size of AGG’s assets under management.
At $248.34 million, NUBD is the only ESG fund in the list that has a larger assets under management figure than its non-ESG counterpart.
The ESG funds appear to be adding net new assets through a combination of institutional acquisitions, model portfolio allocations, and retail investor attraction to ESG as a long-term investment idea.
ESG’s emerging popularity also likely plays a role, as these younger funds will have less money for investors to pull out and reallocate.
“There’s just not that much money to move out,” said Allan Roth of advisory firm Wealth Logic. “It’s not like these funds are 30, 40 years old.”
Institutions also appear to be in part driving the inflows through the first part of the year. According to data from WhaleWisdom, institutions added 5.45 million shares’ worth of EUSB for a 41% increase from the prior reporting period, with advisor service firms like 55 Investors and Envestnet among the largest acquirers. Envestnet also added nearly half of all HYXF’s shares acquired by institutions last quarter and added 2.73 million shares of SUSC.
EUSB and SUSC are among the larger holdings in BlackRock’s target allocation ESG models, according to data from Morningstar chief ratings officer Jeffrey Ptak. However, he said the assets in those particular models aren’t large enough to fully explain the flows.
Traditional energy companies are also a smaller proportion of outstanding corporate debt in recent years, said David Rosenstrock, director of Wharton Wealth Planning in New York. That’s in part due to less interest from the oil and gas sector to issue new bonds after the pandemic cratered oil demand in 2020, leading shareholders to demand capital discipline and cash flow over debt-driven growth.
With the United Nations Intergovernmental Panel on Climate Change continuing to issue growing dire warnings and the U.S. Securities and Exchange Commission proposing a rule to make companies disclose more of their climate risks in periodic reports, there is reason to see ESG as a consideration for investors looking at a longer time horizon.
“Even with today’s inflationary environment and the fact that oil and gas (equities) are outperforming, in fixed income, there’s still this focus (in ESG) and that’s likely to to persist,” said David Rosenstrock, director of Wharton Wealth Planning in New York.
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