Earlier this week, VanEck announced a 33% fee reduction on the VanEck Vectors Green Bond ETF (GRNB), resulting in a new net expense ratio of 0.20%. That matches the net expense ratio of its sole rival in the green bond exchange-traded fund space, the iShares Global Green Bond ETF (BGRN).

Along with the fee reduction, the VanEck fund also switched its index. Before the index change, there wasn’t much difference between the two products regarding many of the exposures and allocations within their respective portfolios. In addition, they also have similar asset amounts and even their ticker symbols are an anagram of sorts.

But VanEck’s repositioning of its GRNB fund provides more of a contrast with its iShares competitor. That should help investors better differentiate between the two products. More important, though, is the question of whether green bonds are a good deal for investors.

Green bonds are a subset of the wider ESG (environmental, social and governance) movement that is gaining momentum within investment circles.

“When you talk about ESG or SRI [socially responsible investing, or sustainable, responsible and impact investing], there are so many ways you can define that,” says Bill Sokol, ETF product manager at VanEck. “Green bonds are different in that they’re defined by the projects they finance, so you don’t have the subjectivity of assessing the issuers’ broader activities. In this case, it’s based on the positive environmental impact on those projects.”

Green projects run the gamut from alternative energy and sustainable water to pollution control and climate change solutions.

There have been more than $150 billion in new issuance of green bonds this year through August, according to the Climate Bonds Initiative, an international body focused on developing the bond market for climate change projects. That organization says total issuance last year was $168.5 billion, and it estimates the market for new issuance this year will hit $259 billion.

That said, there remains a lack of standardization about what exactly constitutes a “green bond.” The Climate Bonds Initiative is a go-to source for certification standards on climate-related green bonds, while the Green Bond Principles, an effort from the International Capital Market Association, provides guidelines for green bond issuers and offers information for investors. 

GRNB And BGRN

The VanEck Vectors Green Bond ETF debuted in March 2017 as the first green bond ETF. It initially followed the S&P Green Bond Select Index, which is a sub-index of the S&P Green Bond Index. It’s a market value-weighted index measuring the performance of green-labeled bonds issued globally. The fund’s new index is the S&P Green Bond U.S. Dollar Select Index, a sub-index of the S&P Green Bond Index that tracks the performance of U.S. dollar green-labeled bonds.

The changing nature of green bonds made the switch doable, says Sokol, noting that the green-bond market is roughly 65% euro-denominated, which reflects investor demand and issuance in Europe for ESG securities in general. But the dollar-denominated market has grown in recent years, making it feasible to launch a strategy focused just on the dollar portion of that market.

“The market has become big enough where you can provide a diversified exposure,” Sokol explains. “Plus, the new index eliminates currency risk.”

And reducing exposure to Europe’s low-yielding fixed-income securities could boost the yield on the VanEck fund. “We think a lot of U.S. dollar-based investors don’t want a very low yield or want to take on the currency risk,” Sokol says. “So we think a U.S. dollar portfolio is more attractive from that perspective.”

Under its prior index, VanEck’s green bond ETF had a 20% country weighting in the U.S. and a 72% weighting in European countries, according to XTF.com. Its currency exposure was 53% euro and 40% U.S. dollar.

With the new index, the U.S. now comprises nearly 30% of the country weighting and European counties collectively make up roughly 13%, according to VanEck. On a currency exposure basis, it went from 53% euro and 40% U.S. dollar to almost 95% U.S. dollar and 0.04% euro.

The iShares Global Green Bond ETF, which launched in November 2018, tracks the Bloomberg Barclays MSCI Global Green Bond Select (USD Hedged) Index. It has a strong weighting toward Europe (about 60%) and a 10% weighting in the U.S.

The hedging mechanism of the fund’s index creates 100% exposure to the U.S. dollar.

The VanEck fund has $26.8 million in assets compared to $28 million for the iShares fund. Regarding performance, the iShares fund is up 11.9% year-to-date, and it sports an annual yield of 2.48% and a SEC yield of 0.57%. The VanEck fund has gained 5.8% this year, and has an annual yield of 1.40% and a SEC yield of 0.46%. 

The SEC yield is the last 30 days of accrued income, and it accounts for interest and dividends, as well as a fund’s expenses. It generally indicates what the fund is expected to pay, and its standardized formula makes it the preferred method to compare funds.

There are broader ESG bond ETFs on the market, and some of those offer higher yields than the two green bond ETFs. But given their different allocations and exposures, it’s hard to make an apples-to-apples comparison.

Green bond ETFs are a distinct animal that appeal to investors who place a high priority on the environment. But given the relatively low asset levels of the VanEck and iShares products, they’ve yet to resonate with a larger audience.

“We’ve seen a lot of investor interest over the past two-and-a-half years, and a lot of questions around green bonds and how to incorporate them into a portfolio,” says Sokol, adding that green bonds can fit within a core fixed-income allocation.

“But it’s a slow process, and there’s still the perception that you sacrifice return when you invest sustainably,” he says. “We we need to overcome that perception because with green bonds it doesn’t mean you’re getting a lower yield versus non-green bonds.”