ETFs for "Green" Exposure

06/05/2020 5:00 am EST


Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

I’ve received a number of inquiries recently about green bonds. These are fixed-income securities that are specifically intended to raise money for climate and environmental projects, notes Gordon Pape, Canada-based investing expert and editor of Internet Wealth Builder.

According to Investopedia, The World Bank issued the first official green bond in 2009. Last year, at least $157 billion worth of these bonds were issued around the world. Some sources put the total even higher. That’s a lot of money directed towards the environment.

So why is it so hard for individual investors to get a piece of the action? John Cook, CEO of Greenchip Financial, recently told us that, while the supply of green bonds is increasing, institutional investors are snapping up new issues and liquidity is poor.

There is no retail Canadian security that specializes in these bonds but there are two U.S.-based ETFs to consider if you’re interested. Here are the details.

iShares Global Green Bond ETF (BGRN)

This fund invests in a portfolio of investment-grade global green bonds, where the use of proceeds is directly tied to promote climate or other environmental sustainability purposes through independent evaluation.

The fund was launched in November 2018 and showed a one-year total rate of return of 6.83% to the end of April. The year-to-date return as of May 20 was 1.38%. Distributions: The fund makes monthly distributions, the amount of which may vary considerably. The trailing 12-month distribution to May 1 was $2.29 (figures in U.S. dollars), for a yield of 4.2% at Friday’s closing price.

There are 383 positions in the portfolio. The majority of the holdings are European, with France accounting for 22.7% of the assets, Germany 9.8%, and the Netherlands 8.1%. About 10% of the holdings are U.S. and 3.5% Canadian. Some 12.4% of the bonds are issued by supranational organizations, such as The World Bank.

The portfolio’s effective duration (a measure of risk) is 7.9 years. The longer the duration, the more vulnerable a bond or a fund is to interest rate movements.

This ETF has about $75 million in assets under management. It’s lightly traded, with an average daily volume of 17,726 units. There are 1.4 million units outstanding. The net expense ratio is 0.2%.

Tax status: Withholding tax of 15% will apply on distributions to units held in a non-registered account, TFSA, or RESP. No tax will apply for RRSPs, RRIFs, or LIFs. The units closed on Friday at $53.90.

VanEck Vectors Green Bond ETF (GRNB)

This ETF seeks to track the performance of the S&P Green Bond U.S. Dollar Select Index. It 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.

As of the end of April, the fund showed a one-year gain of 6.17% and a three-year average annual compound rate of return of 3.49%. The year-to-date gain at that point was 2.68%.

Payments are made monthly and may vary considerably. For the 12 months to May 21, the units paid $0.572. That’s a trailing yield of 2.1%.

This fund is much more heavily weighted to the U.S., which accounts for 31.9% of the assets. China is next at 15.38% and supranational organizations account for just over 13%.

So, the exposure is very different from the iShares fund, which focuses mainly on Europe. About 77% of the assets are investment-grade. The duration is 5.3 years, making this ETF a little less volatile than the iShares entry.

The fund was launched in March 2017. Total assets are just over $32 million. There are 1.2 million units outstanding, with an average daily trading volume of only 6,163, so place a limit order if you decide to buy and be patient. The net expense ratio is 0.2%. The same withholding rules apply as with the iShares fund. The units closed on Friday at $27.22.

The VanEck fund has a longer track record and the returns to date are acceptable. Based on duration, it is also less risky than the iShares entry.

However, the iShares fund offers superior credit quality — only 0.29% of the portfolio is unrated; the rest is BBB or higher with 55% of the assets rated AAA or AA. And it has a better yield, based on the results of the past year. On balance, our choice is the iShares fund and we will add it to our Recommended List.

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