VanEck has launched the VanEck HIP Sustainable Muni ETF (SMI) today, making it the first ETF that is designed to offer exposure to investment-grade municipal bonds that are focused on sustainability initiatives. SMI has an expense ratio of 0.24% and will trade on Cboe Global Markets.
SMI represents an expansion of the firm’s sustainable offerings, which include the VanEck Green Bond ETF (GRNB) and the VanEck Low Carbon Energy ETF (SMOG). The issuer also manages over $7 billion in AUM in various municipal bond ETFs, such as the VanEck Intermediate Muni ETF (ITM).
Active Approach To Sustainable Munis
SMI takes an active approach to the municipal bond space. VanEck has partnered with independent research firm HIP Investor, gaining access to the firm’s ratings for 120,000 bonds on “human impact and profit” (HIP) potential.
According to Michael Cohick, senior ETF product manager at VanEck, the goal is to build a portfolio that maximizes HIP ratings while maintaining the duration and yield characteristics of the ICE U.S. Broad Municipal Index.
HIP Investor’s ratings are combined with fundamental credit analysis to develop a portfolio of municipal bonds that fund projects promoting sustainable development, including affordable housing, green spaces and hospitals.
The portfolio management team will be considering metrics such as climate threat resilience, proximity to opportunity zones, ESG ratings and whether they fulfill various sustainable development goals (SDGs) as set by the United Nations General Assembly.
Per the prospectus, the fund is looking for bonds that are aligned with SDGs 9, 11 and 12.
SDG 9: “build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation”
SDG 11: “make cities and human settlements inclusive, safe, resilient and sustainable”
SDG 12: “ensure sustainable consumption and production patterns”
Quantitative Ratings On Historical Performance
According to Paul Herman, CEO of HIP Investor, these ratings are driven by data reflecting the actual performance of the underlying issuers and obligors based on their mission and related metrics.
Hospital revenue bonds are ranked on metrics such as patient outcomes and satisfaction, while a bond issued by a city might be ranked based on the health of its population, access to public transportation or climate planning initiatives.
Still Awaiting Assets
Data from FactSet shows that prior to SMI’s launch, there were 18 fixed income funds in the Socially Responsible category. Only two of these funds have gathered over $1 billion. The iShares ESG Aware U.S. Aggregate Bond ETF (EAGG) is the largest ESG bond fund, at $1.5 billion.
EAGG’s index starts with that of the Bloomberg Barclays Aggregate Index, then excludes corporate and government-related bonds if the entities are involved in tobacco, controversial weapons, civilian firearms or a severe business controversy.
Taking the same approach as with GRNB, SMI won’t rely on negative screening like EAGG uses. Rather than filtering out certain types of bonds, the fund will rely on HIP Investor’s ratings to rank municipal bonds and select those that score the highest on the specified metrics. Bonds are only eligible for inclusion in the portfolio if they pass all four screens based on HIP Investor data.
While investors have had limited interest in ESG fixed income and green bond ETFs so far, VanEck will have the first-mover advantage when it comes to bringing a sustainability-focused ETF to the municipal bond space.