Oct. 18, 2019, 1:44 p.m. EDT

The first-ever ESG junk bond ETF debuts

With a limited set of securities to choose from, beware of loading up on similar risky companies, one analyst says

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By Andrea Riquier


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’High-yield’ is a polite term for ‘junk’ bonds.

Investors are increasingly drawn to holdings that pay attention to environmental, social, and governance (ESG) issues and financial-services firms are always on the hunt for new flavors of investments to offer.

So a new fund that seems to offer high yield as well as comply with ESG principles might seem attractive, even though it raises some questions about how appropriate it might be for investors.

Nuveen on Thursday launched the ESG High Yield Corporate Bond ETF /zigman2/quotes/214430618/composite NUHY -0.04%  . It’s the industry’s first ESG “junk bond” exchange-traded fund, but the 10th product from Nuveen that incorporates ESG ideals.

Jordan Farris, the company’s head of ETFs, says the idea came from a groundswell of demand for what Nuveen calls “responsible investing.” Nuveen incorporates an additional component — low-carbon usage — to the E, S, and G principles most investors understand.

But there may be some good reasons why this kind of product hasn’t yet been brought to market, said Ben Johnson, a research director at Morningstar. Among other things, it may be challenging to collect robust data sets on issuers of riskier debt, especially on securities that also fit the ESG category.

“There’s just a lot of moving parts and often what you’re left with may deliver on the promise of screening out the bad actors, but the investment proposition might not be all that compelling,” Johnson said.

See: Welcome to the adult table, SEC says to ETFs

While Nuveen says its approach to ESG includes an expectation that its returns will equal those of traditional investing strategies, Johnson points out that such a calculus can be complicated. There may now be more securities issued that fit both of the fund’s criteria than in the past, but there are far fewer than in a more vanilla type of offering.

“My concern is portfolio concentration,” Johnson said. “When you’re trying to meet your values you may be increasing idiosyncratic risk” by loading up on debt from just a few issuers, he said.

Related: Look at this ETF for a ‘conscious capitalism’ approach

It may also be a strange time to consider investing in high-yield debt.

As MarketWatch has reported, junk bonds are being issued with fewer and fewer protections for investors, making risky bets even riskier . Meanwhile, they’re increasingly less attractive as the business cycle winds on. Traders are so skittish about being caught holding risky assets when economic conditions deteriorate that investor interest in junk bonds has long been considered an economic indicator of its own.

Farris acknowledges such concerns but said Nuveen didn’t want to try to time the market. The company wants to offer funds with an ESG approach for investors across all types of assets.

/zigman2/quotes/214430618/composite
US : U.S.: NYSE Arca
$ 23.81
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Volume: 3,007
July 10, 2020 3:39p
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Andrea Riquier reports on housing and banking from MarketWatch's New York newsroom. Follow her on Twitter @ARiquier.

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