Socially Responsible Bond ETFs in the US: A Performance Evaluation

Abstract

This paper seeks to answer whether socially responsible bond Exchange Traded Funds (ETFs) in t he USA can outperform the main local aggregate bond and stock market indices. More specifically, the performance of 62 bond ETFs with Environmental, Social and Governance (ESG) Scores of 7/10 or above is assessed over the period 1/1/2018 - 31/12/2021. The sample has been selected based on data availability over the study period. Standard research methodology is applied including the single-factor market model and the risk -adjusted return metrics of Sharpe and Information ratios. Performance persistence is evaluated too. The findings show that, in raw return terms, the mean bond ETF underperforms the Bloomberg US Aggregate Bond Index and the S&P 500 Index. In addition, the examined ETFs cannot produce any material above-market return. Furthermore, daily returns seem to persist but weekly and monthly returns display a reverting behavior. A similar reverting behavior is observed between the annual return rankings of ETFs. Overall, our resu lts are in line with those findings in the literature that show, on average, ESG portfolios cannot beat the non-ESG peers on a consistent basis.