SMI ETF: Question & Answer

We address frequently asked questions about sustainable municipal bonds including suitability, ratings, how sustainable munis fit into a portfolio and the VanEck HIP Sustainable Muni ETF (SMI).

• What kind of projects are sustainable municipal bonds issued to fund?
• How does SMI screen for suitability?
• Who is HIP Investor?
• Are less affluent municipalities more likely to rate lower or higher?
• Why do NY and CA represent such large weightings?
• Is impact measured and if so, how?
• How does SMI fit into a portfolio?
• How to buy VanEck ETFs?

What kind of projects are sustainable municipal bonds issued to fund?

Sustainable muni bonds support many desired outcomes: to produce healthier patients at hospitals, to educate our students for a meaningful life journey, to generate clean power, and more.

Muni bond sectors include: cities, counties, states, hospitals, schools, water utilities, energy utilities, transportation, and affordable housing. The VanEck HIP Sustainable Muni ETF (SMI) seeks out those bond issuers and issuances that are achieving their missions effectively, consistent with expectations of high performance and accountability of tax-advantaged public sector funds and projects.

Thus, examples of sustainable muni bonds in SMI can fund:

• Public transportation buses and trains, efficiently moving groups of citizens via environmentally beneficial modes.
• Eco-efficient buildings and real estate, which can use less water and energy, reducing waste and emissions.
• Classrooms and teachers for lower-income students, accelerating their learning, and increasing the rates of college matriculation and graduation.
• Clean-energy infrastructure, including solar on schools, as well as lower-emissions power production.
• Water quality and delivery to ensure health and wellness of citizens, agriculture, and productive commerce.

How does SMI screen for suitability?

Suitability for SMI relates to four types of impact, as rated by our HIP Investor, the ratings and data provider for VanEck:

• HIP’s rating of outcomes for each type of entity, like healthy patients at hospitals or graduating students of schools, which map to Environmental, Social, and Governance (ESG); bond issuers must rate 50 or above (on HIP’s 100 point impact scale).
• HIP’s rating of outcomes related to the United Nations Sustainable Development Goals (SDG) 9, 11, and 12 - focused on sustainable cities and communities, and innovation and infrastructure; bond issuers must rate 50 or above (on HIP’s 100 point SDG scale).
• HIP’s rating of climate threats and expected resilience of the related geographic county; bond issuers must rate 33 or above (on the 100 point climate scale).
• The existence of one or more designated Opportunity Zones, which enhances the likelihood of positive impact in economically distressed communities.

HIP Investor’s Ratings described above are based on comprehensive data covering 5 million data points annually across 122,000 entities that can issue muni bonds. The ratings measure actual results of municipal entities, and thus connote beneficial positive impact on people, planet, and trust.

Who is HIP Investor?

Founded in 2006, HIP (Human Impact + Profit) Investor Inc. is an impact-ratings agency, tracking 8 million data points annually to grade how well investments across all asset classes achieve positive (or negative) outcomes for people, planet, and trust. HIP’s methodology, inspired by Maslow’s hierarchy of needs, was developed 15 years ago, before the term ESG was coined, or the field of impact investing emerged. Today, HIP serves VanEck and fund managers worth a combined AUM of $7 trillion.

HIP initiated ratings of 122,000 muni-bond issuers, obligors, and “impact entities” nearly a decade ago to spur more transparency, performance, and accountability in the $4 trillion muni market. As of January 2022, HIP has graded 180,000 issuances on achieving (or failing) the desired mission, along with evaluating the use of proceeds towards positive impact. HIP also rates 11,000 corporates, covering equities and bonds, as well as nearly 200 sovereigns and mortgage backed securities.

HIP’s founder and CEO R. Paul Herman authored The HIP Investor: Make Bigger Profits by Building a Better World (Wiley 2010) and co-authored and co-edited the Global Handbook of Impact Investing (Wiley 2021), available in the VanEck merchandise store.

Are less affluent municipalities more likely to rate lower or higher?

While wealthier communities can invest more to benefit citizens, customers, and communities, the actual outcomes can vary quite widely. Lower-income geographies can operate high-performing school districts, and rural hospitals can serve the region with positive health outcomes. The value of a HIP rating of ESG, SDG, and climate helps to distinguish the leaders from laggards, especially related to the intended mission.

HIP rates 16,000 school districts in the USA. When plotting the HIP Rating of schools versus the revenue-collected-per student (from tuition, taxes, and other fees), each of the quadrants has thousands of schools, including lower-income, higher performing districts.

Thus, there can be a mix of more - and less- affluent educational environments, but the quality of education, student performance, and access to educational programs for learning disabilities and second-languages all can point to higher-impact muni-bond opportunities.

Also, credit ratings can discriminate against lower-income communities, presuming that lower incomes could put repayment at risk. The HIP Ratings point out investable opportunities to provide necessary funding for education leaders.

Revenue Per Student

Source: HIP Investor

Why do NY and CA represent such large weightings?

The states of California and New York can be large weights in any muni portfolio, as these states have higher income taxes and thus the tax-exempt characteristics support a continuous pipeline of new muni bond issuances.

In SMI, munis across multiple sectors can aggregate to higher weights in the fund, as the climate risks in New York and California face fewer threats than those faced by other large state issuers, such as Florida and Texas. The threats of hurricanes, extreme heat, and sea level rise combine with the relative lesser climate action and lagging climate governance in many Southern states.

In addition, leaders of municipal issuers in California and New York tend to focus on advancing the health, wealth, and equality of the citizens they serve more than the corresponding issuers in some other states. Some muni issuers are challenged with lesser revenue from lower tax rates or limited tax bases, which can result in lesser impacts and lagging outcomes of muni issuers not investing enough to build up their communities.

Is impact measured and if so, how?

HIP seeks to measure overall net positive impact – calculated by assessing the mission and outcomes sought. Affordable housing entities need to show proportions of citizens below median incomes and near or below poverty levels. Energy utilities need to show how their power mix and associated emissions are better for nature than burning fossil fuels. Transportation entities need to show multiple modes that move groups of people efficiently, as well as safe, well-maintained roads.

In addition, HIP’s ratings cover the “impact entity,” frequently the issuer and obligor are the same, but can map to the beneficiaries of the muni bond.

HIP also grades the use of proceeds, including those specifically aspiring to UN SDGs, green bonds, social bonds, and sustainability linked bonds. HIP calls out use of proceeds that can negatively affect communities as well, like private prisons, which are excluded.

Issuer, Obligor and Impact Entity

How does SMI fit into a portfolio?

SMI is fixed income and muni bonds in particular, so any muni allocation is a good candidate. SMI can be a substitute for broad-based municipal market exposure.

In addition, as SMI purposefully seeks out higher impact, climate resilient, SDG-friendly muni entities that can ripple results into lower-income areas like Opportunity Zones, any impact-related allocation can fit with SMI.

The VanEck Green Bond ETF (GRNB) is only focused on green bonds from corporates, sovereigns, and taxable munis, and also a fit with fixed income allocations. GRNB and SMI are complementary in a portfolio - and helpful as green bonds have some supply constraints in current markets.

Place-based investing is another theme of impact-oriented portfolios. As SMI invests across sectors in multiple communities, SMI can complement the equity allocations of portfolios, especially those seeking income plus impact.

Screening for impact (including ESG, SDGs, and climate) provides a more complete solution to addressing community-level climate adaptation and social stability drawn from a large universe for pursuing optimal risk-return financial performance.

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