Looking to Bonds for Volatility Protection? Going Green May Be Golden

·2 min read

This article was originally published on ETFTrends.com.

When things get raucous in equity markets, investors often turn to bonds and gold to take some of the edge off.

Investors looking to simply embrace one of those asset classes as a buffer against volatility may want to consider green bonds, which are accessible in exchange traded fund form via the VanEck Vectors Green Bond ETF (NYSEArca: GRNB).

Green debt is offered by both corporate and sovereign issuers and is a small but growing segment of the broader fixed income market. It's also young relative to other bond segments, with the first green bonds issued in 2007. Youth aside, research conducted by Imran Yousaf of Pakistan’s Air University, Muhammed Tahir Suleman of the University of Otago in New Zealand, and Riza Demirer of Southern Illinois University Edwardsville, indicates green bonds held up remarkably well during the coronavirus market swoon of 2020.

In fact, the bonds found in GRNB proved to be better at beating volatility than gold.

“Our findings show that green investments are not necessarily a luxury good for dedicated investors, but have now developed into a necessity with the potential to provide significant investment benefits, even during crisis periods,” according to the paper.

More Positives for 'GRNB'

GRNB holds 270 bonds, roughly three-quarters of which carry investment-grade ratings. Of that group, about 52% carry ratings of AAA, AA, or A.

In other words, credit risk within the GRNB portfolio isn't excessive, and with an effective duration of 5.57 years, GRNB isn't overly vulnerable to sharp changes in long-term interest rates. GRNB has other benefits because green bonds not only act as portfolio diversifiers with commodities and equities, but have protective qualities, too.

“Portfolio analysis further shows that supplementing conventional stock portfolios with green bonds during the COVID-19 pandemic resulted in the highest risk-adjusted returns, compared to those supplemented with other alternative assets in the sample,” note the researchers.

GRNB can deliver on pure performance. Over the past year, the VanEck ETF is modestly higher while the widely followed Bloomberg Barclays Aggregate Bond Index is down almost 2%.

Green bonds are also beating out gold. The research team said that during the coronavirus market tumble, green bonds “are the only alternative asset that plays the role of a strong safe haven against the S&P 500 during periods of heightened uncertainty associated with the pandemic.”

Moreover, when green bonds are properly weighted within a portfolio, they didn't just beat gold during the COVID-19 volatility; the asset class actually topped other environmental, social, and governance (ESG) instruments.

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