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There’s been a huge problem in (what might be called) green investing for a long time. A whole lot of so-called responsible investing funds do what they say they do — make sure you aren’t investing in companies that are environmentally irresponsible. But they don’t do what a lot of people think they do. Which is actively investing in projects and companies that are helping to change the world. That’s why we’re proud to announce the launch of a fund that directly supports green and social projects. It’s called the Wealthsimple North American Green Bond Index ETF (CAD-Hedged) — but we like to call it the Wealthsimple Green Bond ETF. And it means investors can draw a direct line between investing and environmental impact.
Since our founding, Wealthsimple has been proudly on the forefront of making socially responsible investing accessible to everyone. We probably don’t need to tell how important the task at hand is. The world will need to invest massively to achieve a net zero carbon economy — recent estimates suggest we’ll have to harness 1-2% of global GDP for the next 30 years to avoid the worst potential impacts from climate change. But most Canadian financial institutions make decisions every day that only serve to fund the polluters. We wanted to do the opposite.
To help you understand how it all works, we sat down with Ben Reeves, Wealthsimple’s Chief Investment Officer and the guy who helped make the fund.
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What’s a Green Bond ETF?
ETFs, as you’re likely aware by now, stand for “exchange traded funds,” meaning that they are bundles of securities traded on exchanges, just like stocks. A Green Bond ETF is a collection of green bonds that trades on a stock exchange. In the case of Wealthsimple’s Green Bond ETF, it’s traded on the NEO Exchange, listed with the ticker, “WSGB.”
Ok what’s a “green bond”?
The simplest definition of a bond is an agreement between a borrower and a lender to pay back a loan with an agreed-upon rate of interest; individuals invest in bonds to get interest. Green bonds are really no different than other bonds, except that rather than financing the projects most bonds finance (like a new factory), funds from green bonds must be spent on projects that encourage sustainability or environmentally friendly efforts (like creating wind power). A manufacturer wants to move to a LEED-certified factory? A city wants to switch out its gas buses for low-carbon electric trams? A country needs to invest in infrastructure to deliver clean drinking water to its citizens? These would all be ideal candidates for green bonds. Green bonds have become part of the financial mainstream, issued by institutions and companies like the World Bank, the Province of Ontario, and Mid-American Energy.
You can think of a green bond as an opportunity to fund projects that have a demonstrable impact on the transition to a net zero carbon economy.
How does Wealthsimple Green Bond ETF decide which green bonds to invest in?
There are lots and lots of companies and government entities represented within WSGB. But they all meet certain requirements. First, they’re all from developed market countries and denominated in USD to keep the risks within the desired profile. Second, they must be “investment grade,” which means that ratings agencies like Standard & Poors or Moody’s have deemed the entities creditworthy. That all helps make the fund more stable and reduces risk. In addition, all the bond issues have to be verified by the Climate Bond Initiative, a well respected not-for-profit authority on green bonds. Some examples of initiatives WSGB supports are solar projects in Virginia, wind farms in Denmark, light rail in Ontario.
Plus, every single bond in WSGB will be subject to post-issuance verification by Climate Bond Initiative — a fancy way of saying it’s ensured that the funds are being used as promised in pursuit of achieving a net zero carbon economy. To get a sense of the specific players involved, take a gander at WSGB’s index.
What’s so revolutionary about the WSGB?
Many ETFs track established indexes; Vanguard’s Total Stock Market ETF, included in many of Wealthsimple’s portfolios, for example, tracks the CRSP US Total Market Index. Wealthsimple wanted to start a green bond ETF but discovered that no index existed to track the exact green bond market that we sought. So we built our own. Partnering with the Frankfurt-based index builder Solactive and Toronto’s Mackenzie Investments, we’ve created the Solactive Green Bond USD CAD DM CAD Hedged Index, which, though a mouthful, is an index that includes the entire universe of investment-grade green bonds denominated in either Canadian or American dollars.
Will the Wealthsimple Green Bond ETF now be included in Wealthsimple’s SRI portfolio?
Yes, indeed! Existing SRI portfolio holders won’t need to do a thing—their green investments will get greener with no effort at all. The Green Bond ETF will replace a portion of investments currently in SRI portfolios. How much exactly will depend on your current risk tolerance; conservative investors will naturally have a higher allocation to WSGB since it’s a collection bonds, which fit more with conservative investments.
Is the Wealthsimple Green Bond ETF a good investment?
We wouldn’t have made it if we didn’t think so. Since the ETF has a super low .25% management fee, it’s considerably more cost efficient than any similar Green Bond ETF in existence. Green bonds have historically performed similarly to more traditional corporate and multi-national agency bonds, meaning that while they’re somewhat more volatile than government bonds, or treasuries, they have an established track record of being considerably less volatile than stock investments. So investors may consider buying WSGB as part of their fixed-income/bond holdings.
Where can I buy the Wealthsimple Green Bond ETF?
In addition to being automatically incorporated in all Wealthsimple SRI portfolios, WSGB will be available for individual investors to purchase commission-free through Wealthsimple Trade. They’ll also be available through any third-party broker.
Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently hosts "The Originals" podcast and writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier.
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