Vanguard Expands ESG Suite With Launch Of First Fixed Income ESG ETF For U.S. Investors. Vanguard ESG U.S. Corporate Bond ETF is expected to launch in September …
Vanguard filed a preliminary registration statement with the Securities and Exchange Commission to launch Vanguard ESG U.S. Corporate Bond ETF. The low-cost, broadly diversified ETF will be Vanguard’s first ESG-focused fixed income product for U.S. investors and complements Vanguard’s existing equity ESG ETFs and mutual funds. The fund is expected to launch in September and Vanguard’s Fixed Income Group will serve as the fund’s advisor.
“Vanguard’s new U.S. ESG bond fund illustrates our commitment to providing investors with quality investment products and the ability to construct a portfolio that reflects their values,” said Kaitlyn Caughlin, head of Vanguard’s Portfolio Review Department. “Investors in this fund will benefit from our leading fixed income indexing capabilities, a low expense ratio, and robust screening process, all in an accessible and diversified manner.”
ESG investing continues to gain traction around the world. U.S. investors hold more than $321 billion in assets in ESG mutual funds and ETFs and industry-wide assets for the fixed income indexed market doubled in 2019 to approximately $1.3 billion.1,2 Vanguard ESG U.S. Corporate Bond ETF will complement Vanguard’s existing $10.6 billion U.S. equity ESG product suite and offer a diverse fixed income option for investors.
- May 2000 – Vanguard launches its first ESG offering, Vanguard FTSE Social Index Fund (VFTAX), the largest ESG index fund in the U.S with $7.9 billion in assets.
- September 2018 – Two U.S.-domiciled ESG ETFs are launched, Vanguard ESG U.S. Stock ETF (ESGV) and Vanguard ESG International Stock ETF (VSGX) with $1.6 billion and $995.5 million in assets respectively.
- April 2019 – Vanguard introduces an actively-managed equity ESG fund, Vanguard Global ESG Select Stock Fund (VESGX), managed by Wellington Management Company LLP with $130.9 million in assets.
A focus on corporate bond exposure
Vanguard ESG U.S. Corporate Bond ETF will have an estimated expense ratio of 0.12% and seek to track the Bloomberg Barclays MSCI US Corporate SRI Select Index, a rules-based index that captures a broad cross-section of the U.S. corporate bond market and screens out the bonds of companies whose activities that do not meet specific ESG criteria.
Bloomberg L.P. and MSCI have partnered in managing bond ESG indexes for over eight years, and MSCI has managed ESG data for nearly 50 years. Importantly, there are consistent and established methods for screening corporate bonds in accordance with ESG criteria—other areas of the bond market, such as government-backed or mortgage-backed debt securities do not have such procedures in place.
The index methodology includes using the parent Bloomberg Barclays U.S. Corporate Index as a baseline, with Bloomberg and MSCI applying robust exclusion screens for the bonds of companies that the Index provider determines are involved in, and/or derive threshold amounts of revenue from certain activities or business segments related to: adult entertainment, alcohol, gambling, tobacco, nuclear weapons, controversial weapons, conventional weapons, civilian firearms, nuclear power, genetically modified organisms, or thermal coal, oil, or gas.
The Index also excludes the bonds of any company that, as determined by the Index provider, does not meet certain standards defined by the index provider’s ESG controversies assessment, including the United Nations Global Compact Principles, as well as companies that fail to have at least one woman on their boards or do not report board diversity. Additionally, the ESG screens are continually assessed and applied to the investible corporate bond market to determine appropriate, diverse representation and select highly liquid bonds to promote a more liquid ETF for investors to trade in the market.
Managed by Vanguard’s leading Fixed Income Group
Vanguard’s Fixed Income Group, which oversees more than $1.8 trillion in global assets, will serve as the advisor for Vanguard ESG U.S. Corporate Bond ETF.3 The team has managed fixed income funds for more than 34 years, marked by the launch of the first bond index fund, Vanguard Total Bond Market Index Fund (VBTLX), in 1986.
Using their deep investment capabilities, disciplined security selection process, and rigorous risk management techniques, the team has delivered consistent, long-term performance to Vanguard clients—95% of Vanguard’s bond funds outperformed their peers over a ten-year period.4
Vanguard offers 18 U.S.-domiciled fixed income ETFs with more than $228 billion in assets. The firm launched its first ETF in 2001 and today offers 80 ETFs to U.S. investors totaling more than $1 trillion in client assets.
Investing in ESG funds
Vanguard believes ESG investing is an enduring option for investors wishing to align their values with that of their investment portfolio. ESG products may perform differently, and may have different returns, than that of the broad market because they are excluding or including certain securities, resulting in overweights or underweights to some sectors.
Vanguard investment strategists Jan-Carl Plagge and Doug Grim in their paper, “Have Investors Paid a Performance Price? Examining the Behavior of ESG Equity Funds,” found that while differences in industry allocations relative to the broad market exist for ESG funds, there is no significant positive or negative return correlation driven by ESG factors. Investors should continue to assess their investment risk-reward appetite on a fund-by-fund basis.