Fixed-income ETFs with environmental, social, and governance (ESG) purviews are receiving increased attention advisors and investors, a theme pertaining to the iShares ESG U.S. Aggregate Bond ETF (NYSEARCA: EAGG).
EAGG “seeks to track the investment results of an index composed of U.S. dollar-denominated, investment-grade bonds from issuers generally evaluated for favorable environmental, social, and governance practices while exhibiting risk and return characteristics similar to those of the broad U.S. dollar-denominated investment-grade bond market,” according to iShares.
EAGG is catching one with those in the analyst community as well with Morningstar recently initiating coverage of the fund with a “silver” rating – the second-highest Morningstar medal rating.
“This broad market index strategy focuses on issuers with strong environmental, social, and governance characteristics relative to their sector peers, while keeping tracking error low with the Bloomberg Barclays U.S. Aggregate Bond Index,” said Morningstar in a recent note.
Evaluating EAGG
The $239 million EAGG, which turns two in October, holds 1,456 bonds with an effective duration of 5.67 years. Duration measures a bond’s sensitivity to changes in interest rates.
“The fund relies on MSCI’s ESG ratings, which assess how exposed each issuer is to ESG risk and opportunities relative to its sector peers. The fund invests in U.S. Treasuries and investment-grade securitized, corporate, and government-related bond issuers, but only corporate and government-related bond issues have ESG ratings, which account for about 30% of the portfolio,” according to Morningstar.
The fund has a weighted average coupon of 3.70% and an average maturity of 7.72 years. About 39% of its holdings are U.S. Treasuries.
“To minimize unintended bets, the fund limits sector weightings, duration, and credit quality, which has kept this fund’s performance in line with the index during its short history,” said Morningstar.
Over 72% of EAGG’s holdings are rated AAA, meaning credit risk is low. The fund charges 0.10% per year, or $10 on a $10,000 investment.
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