IndexIQ has launched what is thought to be the first actively managed bond ETF focused on environmental, social and governance (ESG) factors with the launch of the IQ MacKay ESG Core Plus Bond ETF (ESGB) on Tuesday.
ESGB invests 80% of its assets in corporate and government bonds that align with broad ESG standards developed by MacKay Shields, an investment group that’s a sister company to IndexIQ under the broader New York Life Investments umbrella.
At its outset, the fund will be split between 35% to 40% in the credit bond category, 20% in asset-backed and commercial mortgage-backed securities, 20% in agency mortgage-backed securities, and the remainder in sovereign debt.
It’s not the first ESG-focused bond fund on the market. The Nuveen ESG U.S. Aggregate Bond ETF (NUBD) and the iShares ESG Aware U.S. Aggregate Bond ETF (EAGG) launched in 2017 and 2018, respectively, and carry respective expense ratios of 0.20% and 0.10%. However, both of those funds are index based rather than actively managed.
Because it’s active, ESGB is pricier, starting with an expense ratio of 0.39% through the end of August 2022, when a contractually obligated fee waiver expires. At that point, the fund will charge a 0.82% expense ratio, according to its prospectus.
Searching For Alpha Alongside Social Good
For that price, investors will get a slice of one of the few actively managed ESG bond funds.
Steve Cianci, a senior managing director at MacKay Shields, told ETF.com that the fund gives every security it looks at an ESG score independent of the other factors, and excludes securities that don’t fit its target standards before considering its potential for returns.
Once the fund buys into a bond, Cianci also expects that the fund’s managers will be in regular communication with issuers to track how they change on various ESG metrics over time.
“Our analyst team really wants to have a high level of engagement with issuers to not only understand their investment policies, but also to have a conversation and share what we feel could be best practices in the industry and create a dialogue with management,” he said.