Market Overview

A Big Splash In The ESG Fixed Income Space

A Big Splash In The ESG Fixed Income Space

To date, a massive percentage of the exchange traded funds extolling the virtues of environmental, social and governance (ESG) investing have been equity-based funds.

BlackRock Inc.'s (NYSE: BLK) iShares unit, the world's largest ETF sponsor, is among the issuers looking to tap into investors' demand for ESG fixed income products.

What Happened

On Tuesday, the world's largest asset manager unveiled its lineup of iShares Sustainable Core ETFs. That group of ETFs is comprised of four established equity-based funds, including the iShares ESG MSCI USA ETF (NASDAQ: ESGU) and the iShares ESG MSCI USA Small-Cap ETF (CBOE: ESML), and three ESG bond funds. ESML debuted in April.

The newest iShares ESG bond fund is the iShares ESG U.S. Aggregate Bond ETF (NYSE: EAGG).

EAGG looks “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.

Why It's Important

In the U.S., there are just over 50 ESG ETFs with a little more than $6 billion in combined assets under management. That's a mere speck compared to the size of the overall ETF space, but BlackRock is forecasting massive growth for ESG funds over the next decade.

Globally, ESG ETFs have about $25 billion in combined assets under management, a figure BlackRock sees surging to $400 billion by 2028.

“A new and more diverse generation of investors are seeking sustainable solutions for the heart of their investment portfolios,” said the asset manager. “Evolving government policy is prompting large institutions around the world to put capital towards sustainable investments.”

If BlackRock's $400 billion forecast is accurate, ESG ETFs and mutual fund will command 21 percent of fund assets by 2028, up from just 3 percent today.

What's Next

The new EAGG is an ESG spin on the widely followed Bloomberg Barclays US Aggregate Bond Index. That rookie fund could find a following as more advisors and millennial investors embrace ESG strategies. EAGG's low fee doesn't hurt. The new ETF charges just 0.10 percent per year, or $10 on a $10,000. That's low among ESG ETFs, fixed income or otherwise.

EAGG holds 281 bonds and has an effective duration of 5.94 years.

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