An Increasingly Relevant Bond ETF

Fixed income investors looking to diversify away from traditional corporate debt, municipal bonds and Treasuries have interesting options to consider in the world of exchange traded funds. Those looking to apply an environmental screen to their bond investments could consider green bonds and the VanEck Vectors Green Bond ETF GRNB.

GRNB, which celebrated its first anniversary earlier this month, follows the S&P Green Bond Select Index. That index “is comprised of labeled green bonds that are issued to finance environmentally friendly projects, and includes bonds issued by supranational, government and corporate issuers globally in multiple currencies,” according to VanEck.

With many investors looking to apply environmental, social and governance principles to asset classes beyond equities, green bonds are one of the fastest-growing segments of the bond market. That could benefit GRNB going forward.

Massive Growth

“Gross issuance of green bonds reached $157 billion in 2017, nearly double that of the previous year,” said S&P Dow Jones Indices. “Fourth-quarter issuance was the fastest quarterly pace on record, adding $48 billion, 30 percent more than seen in each of the previous three quarters.”

GRNB holds 110 bonds, over 57 percent of which are denominated in euros. Over one-third of the ETF's holdings are dollar-denominated issues. GRNB is a global fund with over 20 countries represented, six of which are emerging markets. U.S. issues account for just 7.6 percent of the fund's weight. A green bond maturing in February 2023 issued by Apple Inc. AAPL is GRNB's largest U.S. holding.

Sovereign issuance of green bonds is also surging.

“Sovereign issuance, which began with Poland in December 2016, has grown to $14 billion as of March 2018, with French Treasury, Fijian, Nigerian, Belgium and Indonesian sovereign bonds,” according to S&P Dow Jones. “Hong Kong outlined a grant for first-time green corporate bond issuers and plans to issue the largest amount of green sovereign bonds this year.”

High-Quality Fare

With many green bonds issued by developed market governments or highly rated corporate issuers, credit risk is not a major issue with a fund such as GRNB. Approximately 65 percent of GRNB's holdings are rated AAA, AA or A.

The ETF has a 30-day SEC yield of 1.40 percent and an effective duration of 6.41 years; duration gauges a bond's sensitivity to changes in interest rates. GRNB has added $2.7 million of its $16.2 million in assets under management since the start of 2018.

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