With the number environmental, social and governance (ESG) exchange-traded funds swelling and assets allocated to these products doing the same, advisors and investors are wondering when the trend will make its way to bond funds.
What Happened: Vanguard is doing its part to add to the ESG bond ETF fray. Last week, the index fund giant introduced the Vanguard ESG U.S. Corporate Bond ETF VCEB, adding to a roster that includes four equity-based ESG ETFs with over $12 billion in assets combined.
The new ETF, the first launched by Vanguard this year, tracks the Bloomberg Barclays MSCI U.S. Corporate SRI Select Index.
Why It's Important: VCEB, which holds investment-grade, dollar-denominated domestic corporate debt, is a basic approach to virtuous investing.
VCEB “specifically excludes bonds of companies that MSCI (Index Provider) determines are involved in, and/or derive threshold amounts of revenue from certain activities or business segments related to: adult entertainment, alcohol, gambling, tobacco, nuclear weapons, controversial weapons, conventional weapons, civilian firearms, nuclear power, genetically modified organisms, or thermal coal, oil, or gas,” according to Vanguard.
Excluding alcohol, tobacco, gambling, gun makers and fossil fuel equities is an approach used by many of the largest and oldest ESG equity ETFs. There are other layers of exclusion with VCEB that make the fund relevant in the current market environment.
The fund's underlying index “exclude the bonds of companies that don't meet certain diversity criteria or bonds of any company that, as determined by the Index provider, do not meet certain standards defined by the Index provider's ESG controversies assessment, which measures a company's involvement in major ESG controversies by assessing a variety of factors such as environmental impact, labor rights, human rights, community impact, governance, and compliance with the United Nations Global Compact Principle,” according to the issuer.
What's Next: VCEB, Vanguard's first ESG bond ETF, debuts at a time of increasing adoption of ESG fixed income products. Last year, ESG bond funds had just $850 million in combined assets under management, but that total has since swelled to $1.8 billion.
A big name like Vanguard entering the ESG bond arena could hasten growth here. Plus, VCEB comes with the requisite Vanguard low fee, which could be another source of allure for investors. The new ETF charges 0.12% per year, or $12 on a $10,000 investment.
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