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The Case For The New Green Bond ETF

by
April 3, 2017 11:03 am
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There are over 300 fixed-income exchange-traded funds trading in the United States. As is the case with equity-based ETFs, some critics may be apt to say many of the good ideas are already taken in the world of bond funds.

Bond ETFs

ETF issuers remain intrepid to say the least and there are arguably some nifty ideas within the bond universe that have yet to be addressed. One idea that recently came to life was making green bonds accessible with the ETF wrapper thanks to last month's debut of the VanEck Vectors Green Bond ETF (NYSE:GRNB).

GRNB follows the S&P Green Bond Select Index, which is “is comprised of labeled green bonds that are issued to finance environmentally friendly projects, and includes bonds issued by supranational, government, and corporate issuers globally in multiple currencies,” according to VanEck.

Got Green?

“Green bonds, in short, are simply conventional bonds with an environmentally friendly use of proceeds,” said VanEck in a recent note. “Today, the overall market resembles a core global fixed income benchmark, with similar yield, duration and credit quality. Investors can, therefore, allocate a portion of their global bond allocation to green bonds without significantly altering the risk and return profile of their portfolio. In other words, bond investors can structure a more environmentally aware portfolio without having to compromise on their investment goals.”

GRNB holds 41 bonds, more than 88 percent of which are denominated in euros or dollars. U.S. bonds account for just over 10 percent of the new ETF's weight while emerging markets issuers account for 16 percent.

Investors concerned about credit quality could find a possible destination in GRNB. Over 48 percent of the ETF's holdings are rated AAA or AA.

“With over 50 percent of its holdings rated AA and above, and nearly 40 percent U.S. dollar-denominated, as well as a yield and duration profile similar to the Bloomberg Barclays Global Aggregate Bond Index, the green bond market has risk and return characteristics comparable with the broad global bond market,” according to VanEck. “As a result, replacing a portion of a core global bond allocation with green bonds may have minimal impact to an investor's portfolio. Because of the differences in sector exposures, adding green bonds may also increase the diversification of a global bond allocation. For example, supranational issuers represent approximately 20 percent of the green bond universe versus only 2 percent of the Bloomberg Barclays Global Aggregate Bond Index.”

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