Green bond funds update-April 2023

Observations:

• Green bond funds, the segment of thematic bond funds consisting of five mutual funds/28 share classes and three ETFs that offer investors exposure to environmental projects and investments while seeking market-based returns, principally by investing in green bonds, added $2.4 million, or a month-over-month increase of 0.2%.  Year-to-date, green bond fund assets expanded by $49.9 million, exceeding the gains achieved via capital appreciation.  That said, green bond fund assets under management have still not fully recovered from the month-end peak reached in August 2022 when assets recorded $1,516.0 million.  Refer to Chart 1.  
• Retroactively added to the universe of green bond funds is the $18.8 million Lord Abbett Climate Focused Bond Fund with its nine share classes launched in May 2020.  The fund, which focuses on achieving a total return, invests in the investment and non-investment grade securities of issuers that have or will have, a positive impact on the climate through an issuer’s operations or the products and services provided by the issuer.  The fund does not limit its investments to labelled green bonds and also accounts for ESG factors.  
• The green bond funds segment remains concentrated.  The three largest funds, the Calvert Green Bond Fund, iShares USD Green Bond ETF and the TIAA-CREF Green Bond Fund, make up 83% of the segment’s assets under management.  The net assets invested in the Calvert Green Bond Fund declined by $5.1 million in April while the other two funds added $4.2 million and $0.7 million, respectively.
• All green bond funds recorded positive rates of return since the start of the year.  With an average gain of 0.58% in April, with all but two share classes subject to the highest expense ratios, outperforming conventional benchmarks.  Results in April ranged from a high of 0.92% registered by the VanEck Green Bond Fund ETF and 0.89% posted by the iShares USD Green Bond ETF.  In addition to restricting themselves to US dollar denominated green bonds, the two ETFs feature the lowest expense ratios at 0.2%.  The poorest taxable fund performer in April, excluding the Franklin Municipal Green Bond ETF that gained 0.14%, was the Lord Abbett Climate Focused Bond Fund C shares that gained 0.42%.  The share class was hampered by its 1.29% expense ratio.  Refer to Table 1.       
• On a year-to-date basis with an average return of 3.32%, 50% of funds/share classes outperformed their conventional benchmarks.  On the other hand, trailing twelve month and three-year average returns are still negative at -1.80% and -2.01%, as the bond market is still recovering from the huge resetting of interest rates in 2022 and performance results that were the worst since the start of the Bloomberg US Aggregate Bond Index series that goes back to 1976.  
• Excluding the municipal Franklin Municipal Green Bond ETF, the taxable segment gained 0.60% and 3.30% year-to-date.  
• The average expense ratio applicable to the green bonds segment is 0.64%, ranging from a low of 0.20% levied by the two ETFs that have been in operation for over three years, to a high of 1.66%.