Those who have been following ETF Stream for some time will know how obsessed we are when it comes to financial engineering and product innovation.
My favourite ETF launch of 2020, for example, was the Tabula US Enhanced Inflation UCITS ETF (TINF) which is a first-of-its-kind ETF that combines Treasury Inflation-Protected Securities (TIPS) and US inflation expectations through breakevens in one strategy.
This year, the iShares Global Aggregate Bond ESG UCITS ETF (AGGE) is my selection. Launched in August, AGGE is Europe’s first ETF to offer exposure to the ESG version of Bloomberg’s global aggregate bond index.
Not only does it offer exposure to a basket of global bonds from across 70 countries and in over 30 currencies but it charges just 0.10%, the same price as the cheapest non-ESG version.
As with many aspects of the European ETF market, BlackRock is leading by example by showing issuers do not need to charge more just because a strategy has ESG on the label.
Its index, the Bloomberg MSCI Global Aggregate Sustainable and Green Bond SRI, tracks over 20,000 bonds from across 3,000 issuers worldwide.
It is simply too expensive for any issuer to fully replicate a basket of 20,000 securities so BlackRock employs a sampling methodology to track the index.
As a result, AGGE currently holds 3,062 securities but expect this number to increase as assets grow. For example, the non-ESG version of AGGE, the iShares Core Global Aggregate Bond UCITS ETF (AGGG), tracked 3,922 securities when it had $500m assets under management (AUM) in June 2019. Now, it has $5.5bn AUM and tracks a basket of 8,513 bonds which improves the tracking error of the strategy.
BlackRock has also taken advantage of the successful launch of the iShares China CNY Bond UCITS ETF (CNYB), which houses over $12bn AUM, by holding a 7.2% weighting. This allows AGGE to gain exposure to the Chinese government bond market without having to own the securities directly, an added efficiency for the strategy.
However, offering exposure to China’s government bonds in an ESG ETF has come under fire this year and for good reason. The L&G ESG China CNY Bond UCITS ETF (DRGN) was slammed for greenwashing earlier this year, given the country’s human rights abuses and labour standards.
This is a contentious point for AGGE as a 7.2% weighting to China is no small amount and is only 0.70% percentage points lower than AGGG.
Despite this however, being able to offer global aggregate exposure with an ESG filter for just 0.10% is no small feat and highlights the exposure investors can achieve through what is still known as "passive" investing.