Vanguard Launching ESG Bond ETF - Adviser Investments

Vanguard Launching ESG Bond ETF

July 22, 2020

In this issue: 

Vanguard Launching ESG Bond ETF

Environmental, social and governance (ESG) investing and exchange-traded funds (ETFs) are as popular with investors as chocolate and peanut butter are with snackers—and Vanguard seems to have decided that they, too, are two great tastes that taste great together. After adding two stock-focused ESG ETFs to its lineup in 2018, the fund giant recently announced plans to launch its first ESG bond ETF this September.

Vanguard ESG U.S. Corporate Bond ETF will hold U.S. investment-grade-rated bonds, but like Vanguard’s Social Index fund, will employ “negative screening” when selecting its securities. In this case, it avoids businesses related to alcohol, tobacco, weapons, adult entertainment, thermal coal, oil and gas, as well as companies without at least one woman on their board of directors.

But does adding an ESG screen improve performance in the bond market?

The Vanguard fund’s benchmark, the Bloomberg Barclays MSCI U.S. Corporate SRI Select index, is also brand new, so there’s no record of past performance to evaluate. But if we look at other ESG bond indexes run by Bloomberg and MSCI, there doesn’t seem to be much difference whether you go ESG or not in the fixed-income space.

The chart below compares Vanguard’s Total Bond Market Index and Intermediate-Term Corporate Bond ETF with the Bloomberg Barclays MSCI U.S. Corporate ESG Focus index, which aims to provide broad corporate bond exposure while focusing on companies that rate highly on ESG factors. The lines rise when the ESG index is outperforming.

Sources: Morningstar, Adviser Investments. BBMSCI U.S. Corp ESG Focus launched in 2017 but has history backfilled to 2013. For informational purposes only; not a recommendation to buy, sell or hold any specific securities.

The corporate ESG index outperformed Vanguard’s Total Bond Market Index (which also owns Treasury and mortgage-backed bonds), but at the price of greater risk. Compared with Vanguard’s corporate bond ETF, performance was more or less equal.

So, adding an ESG screen to your bond ETF may not give it a performance boost—but it may make some investors feel more at peace with their portfolios, which is what Vanguard’s really after. Vanguard has stated it wants to be a leader in the ESG space. By adding this new fixed-income option, they’ll not only appeal to bond investors interested in ESG funds but be able to potentially offer ESG target-date or balanced fund-of-funds to investors down the line.

Webinar—Take Your Pick: Recession or Recovery?

This Wednesday, in our live, interactive quarterly webinar, we shared our views on the markets and economy as they relate to the pandemic and presidential election year. We have posted a replay on our website, which you can view at your convenience by clicking here.

Chairman Dan Wiener and Director of Research Jeff DeMaso offered their thoughts on which sectors are leading the market’s rebound, what the medical data can tell us about the economic future and how we’ll know when we’re really poised for recovery.

In our question-and-answer section, Chief Investment Officer Jim Lowell, Vice President Steve Johnson and Equity Research Analyst Kate Austin answered questions about the possibility of a market downturn, the prospects for bond investments and how to think about the impact of the election and pandemic as an investor.

It’s been a fascinating, historic year so far on Wall Street and in the world—to hear our experts’ answers to your most pressing questions about what’s to come, click here.

Treasury Fund Yield Dips Below Zero

Thirty-day yields on Vanguard’s Short-Term Treasury fund dipped into the red late last week, falling to -0.01% on Friday. The move affected only Investor-class shares—the yield on the Admiral shares, whose expenses are 0.10% lower, stayed in the black.

The brief dive appears to have been a consequence of the fund’s large holdings of short-term Treasury Inflation-Protected Security (TIPS) bonds, which often have negative yields when both interest rates and inflation are low. Other short-term bond funds have managed to stay positive—Vanguard’s Short-Term Investment Grade bond fund maintained a 1.30% yield on the same day the Treasury fund went negative.

But the dip is a further sign of funds struggling to keep yields positive. As we pointed out a few months ago, the Federal Reserve’s decision to return interest rates to 0.00%–0.25% and hold them there is already putting pressure on money markets, with many money market funds closing to new investors or waiving fees in an effort to avoid crossing into negative yields or returns. So long as the Fed holds at zero, we may see such waivers creeping further up the yield curve.

Adviser Investments’ Market Takeaways

Calm and clarity have been sorely lacking when it comes to market news recently—that’s why we’re providing Today’s Market Takeaways, short videos in which a member of our investment team analyzes what the market’s telling us.

Recently, Equity Research Analyst Kate Austin provided some insight on how blue chip companies’ drive to fatten their cash reserves is impacting earnings, and Vice President Steve Johnson discussed how to prevent your emotions from driving your investing.

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