Amid the avalanche of new equity-based exchange traded funds adhering to environmental, social and governance (ESG) philosophies, investors have been wondering when more ESG fixed income funds will hit the market. Some of have been around for a little bit and some of those products have been decent performers.
What Happened
That group includes the Nuveen ESG U.S. Aggregate Bond ETF NUBD. NUBD is nearly 2 years old and is an alternative to traditional aggregate bond funds. The fund follows the Bloomberg Barclays MSCI US Aggregate ESG Select Index.
That index “is composed of U.S. government securities, debt securities issued by U.S. corporations, residential and commercial mortgage-backed securities, asset-based securities and U.S. dollar-denominated debt securities issued by non-U.S. governments and corporations,” according to Nuveen.
NUBD is up just over 7% this year, performing inline with traditional aggregate bond benchmarks and has a 30-day SEC yield of 1.92%, which compared to 1.49% on 10-year Treasuries is pretty good.
Why It's Important
The ESG qualifier as applied to bond funds can significantly reduced the number of issues in the fund. While a traditional aggregate bond ETF may hold thousands of issues, NUBD holds just 194 bonds. The Nuveen has a 26.11% weight to corporate bonds, however, a useful trait at a time of depressed yields on government debt.
“According to Bloomberg, there are reportedly over $15 trillion worth of bonds that are currently trading at a negative yield,” said Morningstar. “Currently, the yield on German five- and 10-year bonds are trading at a yield of negative 0.89% and negative 0.68%, just a few basis points from their historically most negative yields. The Swiss 10-year bond is trading at negative 0.93%, only a few basis points from its most negative yield historically, and the Japanese 10-year bond is trading at negative 0.23%, also only a few basis points above its all-time most negative yield.”
Just over 13% of NUBD's holdings are rated BBB, the lower edge of investment-grade territory. That's a full percentage point below the number of BBB bonds in the Bloomberg Barclays U.S. Aggregate Index, NUBD's duration of 5.26 years is inline with that benchmark.
What's Next
NUBD charges 0.20% per year, or $20 on a $10,000 investment, which is decent among ESG fixed income funds. The fund could have staying as more advisors embrace ESG strategies for fixed income portfolios and as more younger investors look to add some bonds to their investment rosters as well.
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