VanEck has launched a new fixed income ETF which is the first to comprise a portfolio of municipal bonds based on positive environmental, social, and governance (ESG) criteria.
The VanEck HIP Sustainable Muni ETF (SMI US) has been listed on Cboe BZX Exchange and comes with an expense ratio of 0.24%.
The fund has been seeded with $10 million in assets.
Jim Colby, Portfolio Manager at VanEck, said: “We’re seeing investor interest in municipal bonds hitting levels not seen since the early 1990s, along with a concurrent increase in focus around sustainable investing approaches, especially in the fixed income marketplace.
“SMI offers investors a core portfolio tool that hones in on those municipal debt securities that are facilitating projects with sustainable and positive impact. We’re excited to be launching this unique sustainability-focused muni ETF, and to be providing a new strategy for those looking for impactful exposure in the tax-exempt fixed-income sleeve of their portfolios.”
Investment approach
The actively managed fund invests in investment-grade, tax-exempt state and local government debt that has been issued to fund projects promoting sustainable development.
The fund harnesses the capabilities of HIP Investor, an independent research firm specializing in rating bonds according to their “human impact” potential.
HIP Investor screens the eligible universe for securities that are considered “climate-resilient”, are issued by issuers with at least one “opportunity zone” (defined as an economically distressed, and typically racially diverse, community), and are in line with promoting UN Sustainable Development Goals (SDG) 9, 11, or 12.
SDG 9 aims to “build resilient infrastructure, promote inclusive and sustainable industrialization, and foster innovation”; SDG 11 aims to “make cities and human settlements inclusive, safe, resilient, and sustainable”, and SDG 12 aims to “ensure sustainable consumption and production patterns.”
According to the fund’s prospectus, eligible bonds include those whereby the proceeds will be used to build new infrastructure such as affordable and safe housing, green spaces, schools, energy-efficient real estate, hospitals, food and nutrition centres, sustainable waste disposals, and air quality management systems. Eligible bonds may also be used for projects targeting specific goals such as mitigating climate change, preparing for natural disasters, or promoting sustainable production and consumption.
Paul Herman, Founder and CEO of HIP Investor, said: “For 15 years, HIP’s analytical rigor has evaluated real-world impacts for investors, advisors, and fund managers, enabling more capital to flow to innovators bringing sustainable solutions for people and the planet. This new ETF enables portfolios to focus on meaningful climate action, increasingly sustainable communities, and stronger resilience overall.”
When constructing the portfolio, the fund’s managers seek to approximate the duration and yield profile of the fund’s benchmark, the ICE US Broad Municipal Index, while simultaneously maximizing the portfolio’s aggregate HIP rating. VanEck will also perform fundamental analysis in a bid to avoid bonds with yields that are considered too low relative to their credit risk.
As of 9 September, New York and California make up the largest state allocations in the fund with weights of 31.7% and 28.9%, respectively, while Pennsylvania also accounts for a sizable 15.0%. The next-largest state allocation is Washington at 5.5%.
Over half (55.4%) of the fund’s allocation is dedicated to bonds rated AA, followed by those rated A at 16.2%, and AAA at 9.0%. Unrated bonds account for 12.8% of the fund’s portfolio.
It is currently yielding 2.63% with an effective duration of 6.24 years. Distributions are made on a monthly basis.
VanEck currently offers seven municipal bond ETFs collectively housing over $7 billion in assets under management.