VanEck launches first sustainable municipal bond ETF

VanEck launched a municipal exchange-traded fund with a sustainability designation, the first ETF of its kind in the municipal space.

The VanEck HIP Sustainable Municipal fund, SMI ticker, introduced Friday, is an actively managed fund focusing on investment-grade state and local government debt that funds projects promoting sustainable development, including affordable housing, green spaces and hospitals.

SMI is using data from HIP Investor, an independent research firm with ratings for 120,000 bonds, and will be led by VanEck Portfolio Manager Jim Colby. It is the eighth municipal bond ETF VanEck runs; the first seven had more than $7 billion total assets under management combined as of July 31. All municipal exchange traded funds hold about $80 billion as of the end of August.

“This was a blank space in the market and we thought it was appropriate for VanEck to step up and offer this exposure for clients,” said Michael Cohick, director, ETF product at VanEck. “We heard clearly from our clients there was demand — from institutions, advisors, insurance companies — they were wondering why no one had done it yet. We found there were no indexes for munis focused on ESG or sustainability. The obvious choice for us was to find the right data provider, as we did in HIP, and to build an active portfolio.”

The portfolio management team integrates four data-driven, quantitative screens to determine a bond’s eligibility for inclusion using HIP data: climate threat resilience; proximity to opportunity zones, which are typically home to lower-income and racially diverse populations; ESG ratings; and the U.N.’s Sustainable Development Goals 9, 11 and 12.

For HIP’s ESG and SDG Rating, bonds must have an above-average rating greater than 50%; for HIP’s Climate Threat Resilience Rating, bonds must have a top-two-thirds rating greater than 33% and HIP Ratings are only assigned to the securities where at least one qualified opportunity zone is located in the issuer’s region.

VanEck uses HIP Ratings to narrow the universe of eligible investments to municipal securities that fund operations or projects that support or advance sustainable development, as well as promote positive social and environmental outcomes or mission accomplishment.

“Using the screening that HIP provides us, we’re starting off with about 60,000 bonds, distilling down to 23,000 opportunities and we believe those bonds have the potential to offer investors attractive returns, over the long term,” Colby said.

“The names are in familiar sectors — airports, state GOs, water and sewer, transportation — many know these issuers well. But what HIP data reveals are bonds from these issuers funding operations or projects that make for stronger, healthier, more vibrant and sustainable communities,” Colby said.

There are currently 27 bonds in the fund, including debt from the San Francisco airport, the New York Metropolitan Transportation Authority, New York City, California, the Pennsylvania Housing Finance Agency and others.

“The depth of information that the HIP ratings provide can be advantageous relative to simply relying on a credit rating,” Colby said.

Colby noted the state of Texas by traditional ratings standards is triple-A, but HIP data may uncover longer-term risks to its potential future creditworthiness.

Cohick and Colby said the firm looked at HIP’s work on equities, which demonstrated that higher HIP ratings translated to better performance.

“We anticipate that may translate a similar outcome for munis,” Cohick said.

“In our research, we found that a highly sustainable strategy such as this may outperform existing index-based broad national funds,” Cohick said. “We believe the fund has huge potential for performing in a way that may allow investors to consider it as a compliment or even replacement in a core portfolio, as investor interest in the sustainable space continues to grow.”