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.
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.
Adviser Investments operates as an independent, professional wealth management firm with expertise in Fidelity and Vanguard funds, actively managed mutual funds, ETFs, fixed-income investing, tactical strategies and financial planning. Our investment professionals focus on helping individual investors, trusts, foundations and institutions meet their investment goals. Our minimum account size is $350,000. For the seventh consecutive year, Adviser Investments was named to Barron’s list of the top 100 independent financial advisers nationwide and its list of the top advisory firms in Massachusetts in 2019. We have also been recognized on the Financial Times 300 Top Registered Investment Advisers list in 2014, 2015, 2016, 2018 and 2019.
Disclaimer: This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities or choose a particular educational savings plans. Our statements and opinions are subject to change at any time, without notice and should be considered only as part of a diversified portfolio. Mutual funds and exchange-traded funds mentioned herein are not necessarily held in client portfolios. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.
You may request a free copy of the firm’s Form ADV Part 2A, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.
Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.
The Barron’s Top 100 Independent Wealth Advisors rankings consider factors such as assets under management, revenue produced for the firm, and quality of practice as determined by Barron’s editors. The award sponsor has not disclosed how many firms were surveyed or considered for this recognition, nor the percentage of total participants that ultimately received recognition. For more information and a complete list of recipients visit https://www.barrons.com/articles/are-ria-firms-growing-too-fast-the-story-behind-the-trend-51568420132. Years Received: 2019, 2018, 2017, 2016, 2015 & 2014.
The Barron’sTop Advisor Rankings by State (Massachusetts) (also referred to as Barron’s Top 1200 Financial Advisers) considers factors such as assets under management, revenue produced for the firm, regulatory record, quality of practice and philanthropic work. The award sponsor has not disclosed how many firms were surveyed or considered for this recognition, nor the percentage of total participants that ultimately received recognition. For more information and a complete list of recipients visit https://www.barrons.com/report/top-financial-advisors/1000/2019. Years Received: 2019, 2018, 2017, 2016, 2015 & 2014.
The Financial Times300 Top Registered Investment Advisers is an independent listing produced annually by the Financial Times and Ignites Research. According to the Financial Times, in 2019, approximately 2000 firms were invited to be considered for its list; 740 responded with 300 being named to this list. The listing reflects each practice’s performance in six primary areas: Assets under management (70-75% of a firm’s score), asset growth (15% of a firm’s score), years in existence, compliance record, credentials and online accessibility. For more information and a complete list of recipients visit https://www.ft.com/content/44d2b2b2-6cef-11e9-9ff9-8c855179f1c4. Years Received: 2019, 2018, 2016, 2015 & 2014.
Awards referenced above do not consider client experience and are not indicative of such. Nor are awards indicative of future performance. Unless otherwise noted, Adviser Investments does not pay a fee to participate in any of these awards. Additionally, awards typically only consider and recognize participants that choose to participate; and are often based on information supplied by the participants—such information should not be assumed to be verified by the sponsor of the award.
The Adviser You Can Talk To Podcast is a trademark of Adviser Investments, LLC. Registration pending.