Decarbonising iShares' LQD ETF

19 minute read

Passive investment dominates public fixed income markets, and bond Exchange Traded Funds (ETFs) have grown in popularity. Among the most used product in the marketplace is the iShares LQD ETF, with net assets of USD 38.3bn.

By applying our portfolio management tool, Fixed Income Optimisation for Net zero Alignment (FIONA), we show that LQD’s negative climate footprint can be considerably reduced without a significant impact on its performance.

These results are achieved while holding duration and sector exposure relatively neutral. When allowing sector weights to vary, climate results strengthen further.

FIONA has been created to provide analysis and climate-positive enhancements to fixed income portfolios. We recognise the limitations on data in this space, and so FIONA has been designed as a data-agnostic framework, to use the best current data, and incorporate new data as it becomes available.

We also recognise the difficulties in aligning to both spot and forward-looking climate data, and so consider a portfolio’s impact in both scenarios. This analysis advances the proposal that there can be alternative index construction rules and associated passive ETFs that enjoy similar investment profiles as LQD but have substantially improved climate-alignment.