Vaneck has launched the VanEck Vectors Green Bond ETF (NYSE Arca: GRNB), the first US-listed fixed income ETF to provide exposure to the fast-growing green bond market.
The ETF has 41 holdings with 91% of assets comprised of investment grade green bonds with 31% rated AAA.
These bonds are debt instruments issued to finance projects or activities that promote climate change mitigation or adaptation, or for other environmental sustainability purposes. GRNB comes to market as the space appears poised for significant growth.
Issuance of green bonds has grown rapidly since the European Investment Bank issued the first green bond in 2007. According to the Climate Bonds Initiative (“CBI”), an investor-focused non-profit organisation working to promote large-scale investment in the low carbon economy, $81 billion of green bonds were issued in 2016 and $150bn is expected to be issued in 2017.
The ETF is physically replicated, distributes income monthly and has a total expense ratio (TER) of 0.40% due to a contractual fee waiver in place until September 2018. The ETF’s gross expense ratio is 0.47%.
“Until now investors have had limited options for efficiently accessing ‘green’ fixed income exposure,” said Ed Lopez, Head of ETF Product Management and Marketing with VanEck. “We believe there’s demand for green bonds from ESG-focused investors, but there may be appeal to traditional fixed income investors as well. Green bonds are simply conventional bonds with an environmentally friendly use of proceeds. So, global bond investors can make an allocation to green bonds without significantly altering the risk and return profile of their portfolio.”
GRNB seeks to track the performance and yield characteristics of the S&P Green Bond Select Index. To be included in the fund’s underlying index, a bond’s issuer must clearly disclose the rationale for the issuance, such as the use of proceeds, and the bond must be flagged as “green” by the CBI. Bonds issued in any market are eligible for inclusion as long as the bond is denominated in a G10 currency. Each bond must have a maturity greater than one month from the index’s rebalancing date. No bond matures in the index.
The index is weighted by market value, with a 10% issuer cap and a maximum allocation of 20% to high yield bonds. France currently has the largest country weighting in the index with 23.6%; supra-national and Germany have the next highest with 20.7% and 12.7% respectively. The majority of the portfolio is investment grade (90.9%), with 31.2% rated as AAA. The index has a modified duration of 6.0 years, a yield to maturity of 1.9% and has seen total returns of 1.7% in the year to the end of February.
Van Eck’s launch comes hot on the heels of several recent launches in the fixed income ESG space. At the beginning of March, Lyxor launched the Lyxor Green Bond UCITS ETF (Euronext: CLIM), the industry’s first green bond ETF. The fund also harnesses the data capabilities of CBI to determine whether bonds qualify as being ‘green’. It has a TER of 0.25% (See: Lyxor launches industry-first green bond ETF).
Earlier this year also saw the launch of the UBS Barclays MSCI Euro Area Liquid Corporates Sustainable UCITS ETF (UIMC) and the db x-trackers II ESG EUR Corporate Bond UCITS ETF (Xetra: XB4F), both of which provide exposure to corporate bonds from issuers that have passed an ESG screen.