Systematic investment specialist Dimensional Fund Advisors has launched its first fixed income ETF incorporating environmental, social, and governance (ESG) criteria.
Dimensional unveiled three ESG-considered equity ETFs earlier this month.
The Dimensional Global Sustainability Fixed Income ETF (DFSB US) has been listed on NYSE Arca with an expense ratio of 0.24%.
The fund is designed to serve as a core investment-grade solution for ESG-aware investors, providing exposure to multiple bond sectors including government and corporate bonds, mortgage-backed securities, bank obligations, commercial paper, repurchase agreements, and money market funds.
Under normal market conditions, the ETF will invest at least 40% of its assets in securities from developed market issuers located outside of the US. Exposure to foreign currency risk will be hedged on a regular basis.
The ETF will not try to outguess the market or time interest rates but will rather maintain a weighted average duration within one year of the benchmark Bloomberg Global Aggregate Bond Index. As of the end of 2021, the benchmark had an average duration of approximately 7.5 years.
Instead, the fund will seek outperformance by systematically capturing factor premia while controlling risk relative to the benchmark.
Specifically, the ETF aims to capture credit premia, the expected incremental return from investing in securities with greater credit risk compared to US Treasuries, and term premia, the expected relative return from investing in longer-dated securities compared to shorter-dated securities, when these factors are perceived to be favourable.
The fund’s investment approach is the same as the $1.7 billion Dimensional Core Fixed Income ETF (DFCF US) which has an expense ratio of 0.19%.
Where DFSB is unique, however, is that it also seeks to deliver an enhanced ESG profile by underweighting companies with inferior sustainability profiles and overweighting those with superior ESG profiles. Dimensional considers a firm’s greenhouse gas emissions, fossil fuel reserves, land use, biodiversity impact, involvement in ESG-related controversies, operational waste, and water use when evaluating a firm’s sustainability profile.
Companies with business operations linked to weapons, tobacco, palm oil, coal, private prisons, and factory farming will also not be eligible for inclusion.
Dimensional debuted its first ESG-aware ETFs earlier this month by launching a trio of funds providing exposure to US, developed ex-US, and emerging market stocks. The ETFs utilize a similar sustainability approach as described above while also tilting weights in favour of companies with smaller sizes, lower relative value, and higher profitability characteristics.
The Dimensional US Sustainability Core 1 ETF (DFSU US), Dimensional International Sustainability Core 1 ETF (DFSI US), and Dimensional Emerging Markets Sustainability Core 1 ETF (DFSE US) come with expense ratios of 0.18%, 0.24%, and 0.41%, respectively.