Shades of Green in the Bond Market (Part 2)

By incorporating ESG criteria, sustainable bond funds are guaranteed to be different from their peers that are underpinned by broad benchmarks.

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In Part 1 of this article, we looked briefly at the U.S. green bond ETF market. In Part 2, we will look at some examples of ETFs incorporating ESG criteria. 

Exhibit 1 illustrates the difference between these two funds, the VanEck Vectors Green Bond ETF (GRNB) and the iShares Global Green Bond ETF (BGRN), and their relevant Morningstar Category averages. Notably, their exposure to credit risk and interest-rate risk are markedly different. Eschewing non-U.S.-dollar-denominated bonds tilts GRNB heavily toward corporate issuers, resulting in greater exposure to the small contingent of junk-rated issuers that have raised green bonds. BGRN is a better pick for green bond market exposure to the extent that its portfolio is a more accurate reflection of the entirety of that market. This limits active risk and results in less credit risk in particular.

Exhibit 2 shows that both ETFs are odd ducks relative to category peers. While BGRN is more conservative and representative of the green bond market relative to GRNB, the fund still courts a considerable amount of active risk versus its peer group. Investors need to understand that the greenest choices involve a tension between being green and taking on different risks relative to the broad market and close peers.

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