ETF Trends
ETF Trends

With the universe of exchange traded funds following environmental, social and governance (ESG) poised to expand, investors should also expect to see more fixed income funds dedicated to virtuous investing.

Some ESG bond ETFs came to market last year, including the iShares ESG USD Corporate Bond ETF (NasdaqGM: SUSC). That ETF “seeks to track the investment results of an index composed of U.S. dollar-denominated, investment-grade corporate bonds issued by companies that have positive environmental, social and governance characteristics while exhibiting risk and return characteristics similar to those of the parent index of such index,” according to iShares.

SUSC, which tracks the Bloomberg Barclays MSCI US Corporate ESG Focus Index, holds 182 corporate bonds. SUSC and counterparts such as the iShares ESG 1-5 Year USD Corporate Bond ETF (NasdaqGM: SUSB) are trying to make ESG inroads for bonds.

“MSCI found a significant difference in performance between government bonds with similar credit default swap (CDS) spreads but different ESG ratings,” according to International Adviser. “Since 2011, those countries with higher ESG ratings have seen their CDS spreads fall by more than countries with relatively low ESG ratings, MSCI has found. This relationship holds for all government bonds, apart from those that have Aaa ratings with CDS spreads below 50 basis points (bps).”

Another ESG bond ETF is the NuShares ESG U.S. Aggregate Bond ETF (NYSEArca: NUBD), which debuted in October.

Environmental assessment categories can include a company’s impact on climate change, natural resource use, and waste management and emission management. Social evaluation categories can include a company’s relations with employees and suppliers, product safety and sourcing practices. Governance assessment categories can include governance practices and business ethics.

NUBD follows the MSCI US Aggregate ESG Select Index, which screens for certain environmental, social and governance, or ESG, criteria when selecting from securities taken out of the benchmark Bloomberg Barclays US Aggregate Bond Index, a broadly designed index that captures U.S. investment-grade, taxable fixed income securities.

“While the idea of socially responsible investing (SRI) is not new, it is new within the bond ETF landscape. That newness is not stopping some industry observers from forecasting significant growth ahead for socially responsible and sustainable bond ETFs. Importantly, the potential for ESG fixed income growth could be widespread across corporate bonds, sovereign debt and other parts of the bond market,” according to Investopedia.

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