1st ESG Junk Bond ETF Debuts

Today Nuveen rolled out an ETF covering the high-yield bond space, but with an environmental, social and governance (ESG) overlay. The Nuveen ESG High Yield Corporate Bond ETF (NUHY) joins the 12 other ETFs in the Nuveen family, nine of which also rely on environmental, social and governance criteria. While socially responsible fixed income ETFs are starting to pop up in the U.S. markets, this fund is the first of its kind in that it covers corporate junk bonds.

NUHY comes with an expense ratio of 0.35% and lists on the NYSE Arca.

The fund is part of Nuveen’s efforts to build up a full ESG offering.

“We want ESG and low carbon to be integrated as a philosophy across a portfolio as opposed to just a 3% or a 5% sleeve,” said Nuveen’s head of ETFs, Jordan Farris.

Methodology

The fund’s benchmark tracks a subset of the Bloomberg Barclays US High Yield Very Liquid Index, which covers junk bonds denominated in U.S. dollars. Companies are evaluated against their industry peers for how well they meet ESG criteria, and the index excludes companies operating in controversial areas like alcohol, tobacco, gambling, weapons or nuclear power entirely, the prospectus says.

Issues are weighted based on market value within their respective sectors, and then sorted into additional groups based on credit quality and ESG score. From there, each of those groups is given a weighting based on market value, its weight in the parent index, its credit quality in the parent index, tracking error, ESG score and tracking error, according to the document.

Nuveen’s methodology is also unique in that it explicitly incorporates low carbon criteria, eliminating companies with high levels of fossil fuel ownership.

“Just because a company has a high ESG score doesn’t necessarily mean it has a low carbon footprint,” Farris noted, pointing out that Nuveen has been in the socially responsible investing space for five decades, and that it has a team of more than 20 people working on ESG analysis.

Farris says that while the parent index for NUHY has approximately 800 components, NUHY’s index has roughly 400.

Contact Heather Bell at [email protected]