The Advent of ESG Fixed Income Exchange Traded Funds (ETFs)
In January 2020, participants at the ETF industry’s most widely attended conference predicted that 2020 was going to be the year of ESG related fixed income ETF launches. Despite the wild year of COVID-19 and its inherent hurdles, several important fund launches were made. Why is this newsworthy? Investors of all stripes and shapes have at least some interest in doing well while doing “good” and this includes investing in the bond markets.
It is important to note that there were already some viable ESG related fixed income ETF products available in the market before 2020. As 2021 marches forward, ESG is becoming more and more mainstream as the proliferation of ESG fixed income funds, or “tools for investors”, as I like to phrase them, become available.
So, which ones will outperform or simply match the performance of other fixed income options in the same market segment? We will all soon find out. I don’t believe investors are ready to invest in a particular fund and then later determine they could have done better by sticking with a plain vanilla bond fund offering or another option that was not driven by ESG.
One may argue that focusing on ESG related fixed income ETFs is unfair as that is a smaller universe of fixed income product offerings than the sheer number and size of fixed income mutual funds. Absolutely agree with the latter and disagree that it is unfair. Using the relatively smaller number of fixed income ETFs gives us, as investors, three benefits a) our focus will be on low-cost funds, b) funds with high transparency into what they hold, and c) the opportunity to look at passively managed or index-based investing v. actively managed fixed income ETFs as the actively managed ETF market continues to grow.
Some ESG related bond ETFs I am following in 2021 include:
How do we know we getting the impact we expect? The real challenge for ESG related fixed income investors is how to measure the actual impact of their investment. While ESG information businesses are rapidly developing we, the investor base, really don’t yet have a clear way to look at gauging the impact of the bonds held in these funds or the impact of the funds themselves.
Without that information, choosing the fund that is right for me is a challenge. Putting aside the “rising tide lifts all boats” analogy, each of the ETFs listed above track an index and in fact, some of them track extremely similar indices. If the funds are buying the same bonds, in similar weights, shouldn’t both their performance and the actual impact of the investment be similar as a result?
Don’t get me wrong, I am a tree hugger that wants to see these funds grow. My money needs to work for me in both return and impact. Watching these offerings and the ESG fixed income market carefully as a result.
Always open to feedback including if I missed a fund or two! Please don’t hesitate to contact me at JR@RiegerReport.com
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