On September 24, 2020, Vanguard launched Vanguard ESG U.S. Corporate Bond ETF (VCEB) which tracks the Bloomberg Barclays MSCI U.S. Corporate SRI Select Index. The expense ratio is 0.12%. The ETF does not advertise a target maturity, other than to say that the maturities on portfolio securities will be “more than one year.” It also excludes small (under $750 million) bond issues.
There are about a dozen ESG-screened, fixed-income ETFs already in operation from BlackRock, DWS, Inspire, Nuveen, and PIMCO. Between them, assets are low in the billions … basically a rounding error on Vanguard’s books.
There are two sorts of “green” bond funds: impact funds, which actively seek out the opportunity to supply funds for desirable projects (for example, buying the bonds that support urban housing renewal) and exclusionary funds, which simply avoid giving your money to undesirable projects. Vanguard’s new ETF is of the latter variety. It excludes investments in:
- Genetically modified organisms
- Gas
- Oil
- Thermal coal (metallurgical is, presumably, different though small)
- Adult entertainment
- Alcohol
- Gambling
- Tobacco
- Weaponry/Warfare:
- Civilian firearms
- Nuclear, controversial, and conventional weapons
- Nuclear power
It also excludes firms that do not have at least one woman on their board of directors, or that get involved in high visibility controversies.
“Investors are increasingly seeking opportunities to better align their investment objectives with their personal values,” said Kaitlyn Caughlin, head of Vanguard’s Portfolio Review Department. Vanguard reports that U.S. investor assets in ESG fixed income mutual funds and ETFs doubled in 2019 to $850 million, and today, stands at $1.8 billion. That demand notwithstanding, some Vanguard insiders (or former insiders) argue that the strategy does not make great investing sense. Dan Wiener, the premier commentary on Vanguard funds, notes in his October 2020 newsletter:
While it’s socially acceptable to wrap uncritical arms around the whole notion of ESG investing, former Vanguard board member Burt Malkiel has done the socially unacceptable and denounced the concept’s execution. In a September op-ed in The Wall Street Journal, Malkiel makes many of the same arguments against the wholesale acceptance of ESG dogma that Jeff and I have for some time now.
Mr. Malkiel’s essay, “‘Sustainable’ Investing Is a Self-Defeating Strategy” appeared in the Journal on September 18th. He argues that there’s no universal standard for what’s “sustainable,” that sustainable investing might be a distraction from the pursuit of policies that might actually make a difference and that “no credible studies show that ESG investing offers consistently higher long-term returns.” In general, his arguments address equity investing. Ten days later the Journal published a letter in response from Tensie Whelan, director of the NYU Stern Center for Sustainable Business. The article’s title sort of captures the content: “ESG Funds Are Competitive and Doing Good” (9/28/2010). Both MFO and Morningstar tend in that direction.
Josh Barrickman will manage the fund, though the importance of a manager of an index funds has always been a bit fuzzy. In any case, Mr. Barrickman has been with Vanguard for 22 years.
Website: Vanguard ESG US Corporate Bond ETF.
