The Advent of ESG Fixed Income Exchange Traded Funds (ETFs)

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:

RiegerReport_022521_1

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

iHR_secondary_Color_RR_Other

Copyright © 2021 Rieger Report LLC. All rights reserved. Redistribution in whole or in part is prohibited without written permission of the Rieger Report LLC. All information provided by the Rieger Report LLC is for informational purposes only, impersonal, and not tailored to the needs of any person, entity or group or persons. It should not be considered financial advice. The Rieger Report LLC receives compensation in connection with licensing its research, advertising on its website, speaking and consulting services.
Past performance of any investment product or index referenced in the Rieger Report is not an indication of or guarantee of future results.
The Rieger Report LLC is not an investment advisor, and the Rieger Report LLC makes no representation regarding the advisability of investing in any such investment fund or other investment vehicle. A decision to invest in any such investment fund or other investment vehicle should not be made in reliance on any statements set forth in this document. Prospective investors are advised to make an investment in any such fund or other vehicle only after carefully considering the risks associated with investing in such funds, as detailed in an offering memorandum or similar document that is prepared by or on behalf of the issuer of the investment fund or other investment product or vehicle. A financial advisor should be contacted to determine what may be best for your individual needs. The Rieger Report LLC is not a financial or tax advisor. A tax advisor should be consulted to evaluate the impact of any tax-exempt securities on portfolios and the tax consequences of making any particular investment decision. No legal relationship is created between you and Rieger Report LLC.
The Rieger Report LLC does not act as a fiduciary or investment advisor. While the Rieger Report LLC has obtained information from sources it believes to be reliable, the Rieger Report LLC does not perform any audit or undertake verification of any information it receives.
The Rieger Report Rankings and model portfolios are opinions of relative ranking among the peer group analyzed as of the date expressed and not statements of facts. Rieger Report model portfolios are intended for illustration only. Any opinion or analysis decisions are not to be construed as recommendations to purchase, hold or sell any securities or to make any investment decisions, and do not address the suitability of any security. The Rieger Report LLC does not assume any obligation to update the content in this publication in any form or format.
Your use of any information from this document or presentation is at your own risk and without recourse against Rieger Report LLC, its members, managers, or employees. To the maximum extent permitted by law, Rieger Report LLC disclaims any and all liability in the event any information, commentary, analysis, and/or opinions prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses.