Invest with a Conscious: ESG in Bond Portfolios – ETF Trends

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Investors looking to invest with a conscious have an increasing amount of options in the world of ETFs and that includes fixed income funds.

A couple of months ago, BlackRock’s iShares introduced four new bond exchange traded funds that screen for quality, value and environmental, social, governance (ESG) principles.

One of those funds is the iShares ESG USD Corporate Bond ETF (NasdaqGM: SUSC). That ETF “seeks to track the investment results of an index composed of U.S. dollar-denominated, investment-grade corporate bonds issued by companies that have positive environmental, social and governance characteristics while exhibiting risk and return characteristics similar to those of the parent index of such index,” according to iShares.

SUSC, which tracks the Bloomberg Barclays MSCI US Corporate ESG Focus Index, holds 182 corporate bonds. SUSC and counterparts such as the iShares ESG 1-5 Year USD Corporate Bond ETF (NasdaqGM: SUSB) are trying to make ESG inroads for bonds.

“As of 31 March 2017, investors have over $200 billion invested in total assets in equity mutual funds and exchange-traded funds (ETFs) that are designated as socially conscious or sustainable (source: Morningstar),” according to BlackRock. “However, fixed income investors have not had many sustainable investment choices. This is in part due to the fact that most research in this space has centered around stocks. Although bonds do not have voting rights, ESG considerations can be applied to the construction of bond indexes similar to how they are for equity indexes.”

Related: Sector Tilts Help This Smart Beta ETF Outperform

SUSC has a 30-day SEC yield of 2.9%, which is better than what investors will find on 10-year Treasuries. The ETF has an effective duration of 7.4 years and a weighted average maturity of almost 11 years.

“ESG considerations can potentially translate into better long-term financial performance as they help to identify risks and opportunities that are not well captured by traditional financial analysis,” said BlackRock. “For example, issuers that are less exposed to risks due to environmental issues (E), or are better able to attract and retain skilled workers (S), or have stronger corporate governance (G) could potentially outperform peers in their respective industry in the long run. This longer-term view especially lines up with the typical investment horizon of bond investors.”

Over 86% of SUSC’s holdings are rated A or BBB. The new ETF charges 0.18% per year, or $18 on a $10,000 investment, which is reasonable among rival strategies.

For more on Smart Beta ETFs, visit the Smart Beta Channel home page.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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