Exchange-traded funds (ETFs) have become a multitrillion-dollar industry by offering investors easy access and exposure to a broad portfolio of securities at low cost. It’s no surprise, then, that socially responsible ETFs have become highly popular.
These ETFs, including those holding bonds, represent the convergence of two investment trends. The first is socially responsible investing (SRI), which has been a particular focus of millennials. Second, investors focused on SRI also look closely at environmental, social, and governance (ESG) factors in making investment decisions.
Investors should note that socially responsible funds have recently become a target of criticism of the U.S. Securities and Exchange Commission (SEC). After a lengthy review, the SEC warned that it had uncovered a long list of problems at many of these funds, including examples of “unsubstantiated and potentially misleading claims” regarding SRI strategies. The SEC found that some firms had no formal processes in place for ESG investing, despite claims to the contrary.
These issues are a reminder to investors they should scrutinize a fund carefully before choosing an ETF, including possible comments or actions by regulators.
- Socially responsible exchange-traded funds (ETFs), as closely represented by the Bloomberg US Aggregate Bond Index, underperformed the broader market over the past year.
- The ETFs with the best one-year trailing total returns are FLTR, FLRN, and FLOT.
- The top holdings for these ETFs are floating rate notes (FRNs) for HSBC Holdings Plc, Morgan Stanley, and Goldman Sachs Group Inc., respectively.
There are 21 bond ETFs with an ESG score of 8.0 out of 10 on ETF Database that trade in the United States, excluding inverse and leveraged ETFs as well as those with less than $50 million in assets under management (AUM). There isn’t really a common benchmark for socially responsible bond investing, but the Bloomberg US Aggregate Bond Index is the closest proxy available. This index has underperformed the broader market over the past 12 months, with a total return of -3.9% compared to the benchmark S&P 500’s total return of 28.0%.
The best-performing socially responsible bond ETF, based on performance over the past year, is the VanEck Investment Grade Floating Rate ETF (FLTR).
Below, we’ll look at the top three socially responsible bond ETFs, as measured by one-year trailing total returns, for the first quarter (Q1) of 2022. All performance figures above and numbers below are as of Dec. 16, 2021.
- Performance Over One-Year: 0.5%
- Expense Ratio: 0.14%
- Annual Dividend Yield: 0.76%
- Three-Month Average Daily Volume: 198,555
- Assets Under Management: $760.6 million
- Inception Date: April 25, 2011
- Issuer: VanEck
The VanEck Investment Grade Floating Rate ETF is a short-term corporate bonds fund that invests in fixed-income securities with durations of one to five years. The fund tracks the performance of the MVIS US Investment Grade Floating Rate Index, which gives investors exposure to floating rate notes (FRNs) that offer minimal interest rate risks.
Unlike most bond ETFs that pay a fixed rate over the life of the note, FLTR adjusts its coupon payment based on a specific reference rate.
- Performance Over One-Year: 0.3%
- Expense Ratio: 0.15%
- Annual Dividend Yield: 0.48%
- Three-Month Average Daily Volume: 494,285
- Assets Under Management: $2.4 billion
- Inception Date: Nov. 30, 2011
- Issuer: State Street
The SPDR Bloomberg Investment Grade Floating Rate ETF provides investors with exposure to debt instruments paying a variable coupon rate. FLRN targets the price and performance of the Bloomberg US Dollar Floating Rate Note <5 Years Index. As a result, the fund’s holdings maturity date must be from one month to five years.
FLRN’s holdings may include U.S. registered bonds and bonds of non-U.S. corporations, governments, and entities. The fund’s top three holdings are FRNs of Morgan Stanley, due Jan. 20, 2023; Inter-American Development Bank, due Jan. 15, 2022; and International Bank for Reconstruction and Development, due Jan. 13, 2023.
- Performance Over One-Year: 0.2%
- Expense Ratio: 0.15%
- Annual Dividend Yield: 0.49%
- Three-Month Average Daily Volume: 890,417
- Assets Under Management: $7.2 billion
- Inception Date: June 14, 2011
- Issuer: BlackRock Financial Management
FLOT provides exposure to U.S. floating bond rates with adjustable interest payments to reflect the prevailing interest rates. The fund invests in floating rate bonds with maturity durations of one to five years.
While the zero interest rate risk is a draw to investors, the expected yields are usually lower compared to what ETFs investing in fixed-rate debt have to offer.
FLOT’s top three holdings are FRNs of Goldman Sachs Group Inc. (GS), due Feb. 23, 2023; International Bank for Reconstruction and Development, due Jan. 13, 2023; and Morgan Stanley, due Oct. 24, 2023.
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