Vanguard expands ESG ETF suite to include corporate bonds

The Vanguard Group, sensing an opening in the fast-growing sustainable investing market, has filed to launch the Vanguard ESG U.S. Corporate Bond ETF.

The exchange-traded fund, which is expected to be available to investors in September, will help fill in a gap in the ESG space, according to Todd Rosenbluth, director of mutual fund and ETF research at CFRA.

“This is a logical next step for Vanguard because in the fixed-income space there are far fewer ESG products and less assets, and not necessarily for good reasons,” he said.

While bond funds still lag behind equity funds when it comes ESG strategies, Rosenbluth said corporate debt issuance represents a growing area of focus for investors focused on sustainable investing.

“It’s a newer and relatively small category,” he said. “If you’re uncomfortable owning companies that are ESG unfriendly in your stock portfolio, you should be equally uncomfortable owning them in you bond allocation.”

That’s the mindset Vanguard is likely banking on with its new ETF, which will compliment Vanguard’s existing $10.6 billion U.S. equity ESG product suite.

According to Vanguard’s data, U.S. investors hold more than $321 billion in assets in ESG mutual funds and ETFs, and assets for the bond indexed market subcategory doubled in 2019 to approximately $1.3 billion.

Vanguard launched its first ESG offering in May 2000, the Vanguard FTSE Social Index Fund (VFTAX), which is the largest ESG index fund in the U.S. at $7.9 billion.

In September 2018, Vanguard launched two U.S.-domiciled ESG ETFs, the $1.6 billion Vanguard ESG U.S. Stock ETF (ESGV), and the $996 million Vanguard ESG International Stock ETF (VSGX).

[More: Vanguard’s efforts to navigate politics of ESG could be blueprint for others]

In April 2019, Vanguard launched an actively managed ESG fund, the $131 million Vanguard Global ESG Select Stock Fund (VESGX), which is managed by Wellington Management Company.

[Interested in even more ESG news? Check out InvestmentNews’ ESG Clarity US]

“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.

The new 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.