Going Green Is Worth It In Bond ETFs

Fixed income investors looking to apply some environmental virtue to bonds have a friend in the VanEck Vectors Green Bond ETF GRNB. Moreover, the green bond market is meeting and surpassing prior growth forecasts.

GRNB debuted more than two and a half years ago as the first exchange traded fund dedicated to green bonds, or debt issued to finance environmentally friendly projects. The fund tracks the S&P Green Bond U.S. Dollar Select Index.

That index “is comprised of U.S. dollar-denominated green bonds that are issued to finance environmentally friendly projects, and includes bonds issued by supranational, government, and corporate issuers globally,” according to VanEck.

Why It's Important

A recent Federal Reserve estimates that, over the years, wildfires have cost the U.S. economy $500 billion. That's just one environmental anecdote, but it underscores the point that on a global basis, more companies, central banks and international monetary agencies are becoming wise to detrimental effects of climate change.

That increased awareness could carve a niche for green bonds and funds such as GRNB. Data suggest that's already happening.

“In June 2019, Reuters published that green bond issuance for the year had surpassed USD 100 billion,which extolled a milestone of the first time the green bond issuance pace had reached the USD 100 billion mark by the first half of the year,” S&P Dow Jones Indices said in a recent note. “Issuance could be on track to double by the end of the year. Since the end of June, USD 90 billion more has been issued, bringing the 2019 total to USD 212 billion in issuance as of October 2019.”

GRNB has an effective duration of 4.84 years. Nearly 78% of its holdings are rated investment-grade with over 58% residing somewhere between AAA and A, so its fair to say the fund's primary source of risk is rate-, not credit-driven.

What's Next

Today, the green bond market is just a sliver of the overall fixed income universe, but that's poised to change and that growth could benefit GRNB.

“Currently, the green bond market is small when compared to the overall fixed income market. Issuance continues to increase along with the diversity of issuers,” said S&P Dow Jones. “The existence of the green bond market and the S&P Green Bond Index is a start, but if capital markets are to meet the needs of the environment and reversing the damages of climate change, the scale of investment capital would have to be exponentially larger in order to meet the challenge.”

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