Top 5 Green Bond ETFs in 2021

With a new year come new resolutions. Maybe yours is to start investing your money, or if you already started, maybe you would like to make more impactful investments through sustainable fixed-income products like Green Bond ETFs.

Stocks are a great way to support companies that have best practices to preserve the environment or social welfare. Notably through ESG investing, which groups investments that incorporate environmental, social, and governance performance criteria in securities selection. If you want to know more about ESG ETFs, Trackinsight has you covered!

What are green bonds?

However, a diversified portfolio should include a fixed-income allocation to decorrelate its performance to stock markets’. Fixed-income investments also offer a sustainable product range, and the most popular are green bonds. Green bonds are fixed-income instruments used to fund projects that have a positive impact on the environment or climate benefits. They have recorded tremendous growth through the years and have reached a total of $1.3 billion in 2021. The number of issuances continues since in 2021 the number of issuances has grown by approximately 35% compared with 2020. Most green bonds are issued by developed markets corporates and sovereign entities.

List of Top 5 Green Bond ETFs in 2021

In order to facilitate your research about sustainable fixed-income products, here is a list of 5 green bonds ETFs that have successfully attracted investors in 2021:

1. Xtrackers EUR Corporate Green Bond UCITS ETF +USD 145 million
2. iShares Global Green Bond ETF +USD 124 million
3. Xtrackers USD Corporate Green Bond UCITS ETF +USD 122 million
4. Lyxor Green Bond UCITS ETF +USD 75 million
5. Franklin Liberty Euro Green Bond UCITS ETF+USD 66 million

1 - Xtrackers EUR Corporate Green Bond UCITS ETF +USD 145 million

The Xtrackers EUR Corporate Green Bond UCITS ETF is a passive UCITS product that aims to track the Bloomberg MSCI EUR Corporate and Agency Green Bond Index. It is meant to reflect the performance of EUR-denominated investment-grade green bonds issued by corporations and agencies. It is rated B+ by Conser, meaning the overall ESG practices of the ETF constituents are above average.

The index caps constituent weights at 5% to provide an additional layer of diversification to reduce concentration in specific issuers.

With a TER of 0.25%, this ETF is a little cheaper than the average competitor’s TER of 0.27%.

In terms of country allocation, as for most green bonds ETFs and since it only includes Euro-denominated bonds, the fund has a bias towards Europe and notably France with almost 30% of the bonds issued by French entities.

All maturities are represented in the index without any significant bias.

2 - iShares Global Green Bond ETF +USD 124 million

The iShares Global Green Bond ETF is designed to reflect the performance of the Bloomberg MSCI Global Green Bond Select Index. It gives investors exposure to global investment-grade green bonds issued by any type of entity. Because the index includes bonds denominated in several currencies, it is hedged to currency fluctuations versus the US dollar.

The ETF is rated A- by Conser, meaning the overall ESG practices of the ETF constituents are well above average.

This ETF is relatively cheap compared with its competition. Indeed, it has a TER of 0.20% vs 0.27% on average for the competitors.

Again, and as for many green bond ETFs, European-issued green bonds represent a large portion of the fund. However, all maturities are represented in the ETF.

3 - Xtrackers USD Corporate Green Bond UCITS ETF +USD 122 million

The Xtrackers USD Corporate Green Bond UCITS ETF is a passive ETF that replicates the performance of the Bloomberg MSCI USD Corporate and Agency Green Bond Index. This ETF is for investors who seek to invest in USD-denominated investment-grade green bonds issued by corporates and agencies. Like its EUR twin, the index sets up an issuer cap of 5% to avoid overconcentration in specific constituents. It is rated C- by Conser, meaning the overall ESG practices of the ETF constituents are well below average.

Relative to other green bond ETFs the Xtrackers USD Corporate Green Bond UCITS ETF is a little cheaper with a TER of 0.25% compared with 0.27% on average for the competition.

Unsurprisingly, since the index invests only in USD-denominated bonds, about 60% of the bonds are issued by US entities. The index is diversified in terms of maturity. It is interesting to note that the Euro-hedged share class is particularly attractive to investors, meaning the ETF is popular among European investors.

4 - Lyxor Green Bond UCITS ETF +USD 75 million

The Lyxor Green Bond UCITS ETF is a UCITS product that aims to reflect the performance of the Solactive Green Bond EUR USD IG Index. It comprises investment-grade green bonds denominated in Euro and US dollar issued by any type of entity. It is important to note that the Euro-hedged share class is the most popular. Even though this ETF is considered ESG, it is not currently rated by Conser.

Unlike the top 3 ETFs in terms of inflows, the Lyxor Green Bond UCITS ETF is more expensive than the competition with a TER of 0.30% versus 0.27% for its peer group.

Europe-issued bonds represent more than 70% of the index and French bonds alone account for 22%.  However, the index does not exhibit any bias towards any maturity representation.

5 - Franklin Liberty Euro Green Bond UCITS ETF +USD 66 million

The Franklin Liberty Euro Green Bond UCITS ETF is the only actively managed ETF of the top 5 green bond ETFs of 2021. It provides exposure to the European green bond market. The fund invests at least 75% of its Net Asset Value (NAV) in green bonds and most of the bonds it holds are denominated in European currencies. It is worth noting that as of Jan 4th, 2022, 9% of the bonds held are rated under BBB i.e., non-investment grade. It is rated A by Conser, meaning the overall ESG practices of the ETF constituents are very good.

Even if the fund is actively managed, it still has a relatively low TER of 0.30%.

Should you add green bonds to your portfolio?

Green bonds are growing in popularity and so are the ETFs that focus on them. They can offer investors a convenient solution for adding a sustainable dimension to their fixed income portfolios. However, even though it is attractive on the paper to contribute to environmental protection, investors should not forget about performance. Indeed, in 2021, green bonds had a rough year and green bond ETFs recorded an average performance of -5.73%. It is still possible to earn positive returns with green bonds, but investors should pay attention to market movement catalysts such as central banks policies.

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