The AGG family is growing–sustainably
Matt Tucker: We just celebrated the 15th anniversary of the iShares Core U.S. Aggregate Bond ETF, or AGG, which sits at just over $56 billion in assets under management, as of October 31. Why did we decide to create another fund that seeks similar risk and return of Â the Bloomberg Barclays U.S. Aggregate Bond Index?
Patricia Kao: Itâs precisely because âthe Aggâ index is so pervasive that we wanted to tackle this exposure from a sustainable investing angle. This is also known as ESG, for environmental, social and governance. More and more people are looking to align their sustainability objectives with their financial goals, but donât know how to go about it.
Along with the other products in our Sustainable Core suite, we wanted to provide an easy and seamless way to invest the way that people are already used to doing: aiming to track a widely followed market benchmark, but with a more sustainable footprint.
We found that U.S. investors are particularly sensitive to sustainable investing approaches that deviate too much from âmarket returnsââparticularly on the downside. Thereâs still a perception that sustainable investing automatically requires you to sacrifice returns, but that doesnât have to be the case anymore.
Matt: So what should investors expect with an ESG-oriented Agg index exposure? What do the ESG scores add?
Patricia: Well, the main point is that EAGG seeks a similar risk and return profile as the Agg index.
Iâll offer an analogy: some people prefer to buy and consume organic food. Even though an organic apple is nutritionally indistinguishable from a conventional apple, consumers might make this choice because they donât want exposure to pesticides, or they want to minimize their environmental footprint. Itâs very similar with our ESG-oriented Aggregate bond fund. Itâs designed to look and behave a lot like the parent index. And, as Martin Small recently wrote about, ESG data can help to fill in some of the blanks left by traditional financial analysisâwhether thatâs putting an additional lens on hard-to-quantify risks such as governance, or simply because investors would prefer to see a âdifferentâ mix of names in their portfolios.
Matt: So investment performance and sustainability arenât an âeither/orâ proposition? How do we aim to do that?
Patricia: There are a lot of different approaches to creating sustainable portfolios. Some portfolio managers look to avoid the âworst offendersâ or, on the flip side, invest only in specific projects with a defined (non-investment-related) social impact. EAGGâs index starts with a top level screen (e.g., weapons or tobacco), but most importantly weâve designed our funds so that they seek a risk profile that is similar to the parent index of the fundâs benchmark. Consequently, it doesnât require a compromise of return goals to choose an ESG investment.
To a lot of investors, fixed income is about downside avoidanceâwhich actually fits nicely with an ESG approach. Academic empirical research is fairly sparse as this is still a developing field.
Matt: Letâs drill down a bitâ¦ how does our ESG bond approach differ from those used for stocks?
Patricia: Thatâs a great question. There has been a lot of attention paid to ESG in equity investing, but itâs still pretty rare to see viable solutions for ESG in fixed income. Which is interesting, because intuitively itâs a more natural fit. Bonds are just math. Unlike stock picking, itâs easier to replicate a bond portfolio outcome by substituting high-scoring ESG issuers for lower-scoring ones. For example, if you find a few five-year bonds with around 3.5% yield and single-A credit rating, you might overweight the one with higher ESG scores without altering the overall risk/return profile.
So we have similar objectives across our equity and fixed income fundsâseek to replicate a market benchmark in an ESG-friendly wayâbut itâs easier to replicate in the bond space, in terms of the actual uplift to resulting ESG scores.
Matt: So how do we measure that upliftâhow can you evaluate the impact of these funds?
Patricia: In addition to building EAGG and our other sustainable ETFs, we wanted to be able to demonstrate and quantify the impact of every dollar in each portfolio. With the launch of EAGG and iShares Sustainable Core suite, weâre introducing impact reporting on a fund-level basis, so youâll be able to see top level ESG scores right away. EAGGâs first impact report is not yet available, but if we use the iShares ESG 1-5y USD Corporate Bond ETF (SUSB) as an example, we can see that it has an MSCI ESG Quality Score of 8.0, as of October 31. Thatâs versus 5.1 for its Bloomberg Barclays reference benchmark.
Matt: Whatâs next for sustainable fixed income investing?
Patricia: ESG and sustainable investing have sometimes been painted as too niche, too expensive, too hard to measure, etc. But all thatâs changing with new data and new products. I think weâll see more innovation and more adoption of these new tools. Weâre on the cusp of sustainable investing going mainstream, which is so fitting for ETFs and iShares. Fifteen years ago, we made the Agg Index accessible to all investors, and now we are offering new ways for investors to pair performance with purpose.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.