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All Contents © 2019The Kiplinger Washington Editors
By Will Ashworth, Contributing Writer
| October 10, 2019
Investors are rapidly moving toward investing with environmental, social and corporate-governance (ESG) qualities in mind. Assets in ESG ETFs and other exchange-traded products (ETPs) grew by $7.6 billion, or 29.5%, in 2018. That growth rate is several times higher than the 4.6% increase in overall ETF/ETP assets.
Mass shootings in Dayton, Ohio, and El Paso and Odessa, Texas, are among the various incidents that kept the spotlight on ESG investing this year. Many investors found themselves double-checking whether their funds were gun-free or not. And eliminating gun companies (and other ESG-unfriendly stocks) isn't as easy as you might think.
For instance, Canada's largest pension plan owns shares of gunmaker Sturm Ruger (RGR), Smith & Wesson parent American Outdoors Brands (AOBC) and ammunition manufacturer Olin (OLN). It's not a lot, mind you – its C$400 billion portfolio only invests a mere C$37 million in gunmakers – but it's still enough to concern Canadian ESG investors.
"I want to make sure that my money isn't doing harm," Tina Lopes, a mother of three, told the CBC. "I don't want to profit from companies, manufacturers or industries that could potentially harm people."
That kind of sentiment is what's driving experts to estimate that ESG assets will explode from half of assets managed by global funds in 2016, to two-thirds by 2020. ETFs will be a big part of that growth. Here are seven of the most interest ESG ETFs to buy if you're interested in joining the trend.
Data is as of Oct. 9.
Total Assets: $1.5 billion
Expense Ratio: 0.10%, or $10 annually on a $10,000 investment
The Xtrackers MSCI USA ESG Leaders Equity ETF (USSG, $26.53) is one of the largest and most liquid ESG ETFs on the market. At $1.5 billion in assets, it's second only to the iShares ESG MSCI USA Leaders ETF (SUSL) with $1.6 billion in assets, and tied with the iShares MSCI KLD 400 Social ETF (DSI).
USSG got off to a big start in March 2019 thanks to an $800 million-plus investment from Ilmarinen, Finland's largest pension fund. Ilmarinen invested a similar amount in SUSL when it launched in May.
That's a big shot in the arm.
USSG tracks the performance of the MSCI USA ESG Leaders Index – a portfolio of more than 300 large- and mid-cap U.S. stocks that have high ESG rankings relative to their sector peers. The fund is only six months old, so it doesn't have much of a track record to look back on.
The MSCI USA ESG Leaders Index, however, has existed for well more than a decade. Since June 1, 2004, the index has experienced only three years with negative returns. It has averaged 8.5% in annual returns through Sept. 30, which is only slightly less than the 8.9% of the MSCI USA Index, which consists of more than 600 large- and mid-cap U.S. stocks. Depending on the year, the ESG index actually outperformed – a reminder that you're not necessarily sacrificing much, if any, in the way of returns by investing responsibly.
The largest slug of the portfolio is in information technology (28.7%), including top holdings Microsoft (MSFT) and Google parent Alphabet (GOOGL). It also has significant chunks invested in consumer discretionary (13.7%), health care (13.4%) and financials (12.2%).
The ETF itself is dirt-cheap too, charging just 10 basis points (a basis point is one one-hundredth of a percent) in annual expenses.
Learn more about USSG at the DWS Xtrackers provider site.
Total Assets: $418.4 million
Expense Ratio: 0.15%
If you're interested in geographical diversification, consider the Vanguard ESG International Stock ETF (VSGX, $48.63). It not only screens out adult entertainment, alcohol and tobacco, weapons, fossil fuels, gambling and nuclear power companies, but it also excludes companies that don't meet certain diversity and U.N. standards.
This ESG ETF tracks the performance of the FTSE Global All Cap ex US Choice Index. The index is a collection of more than 3,630 stocks of all sizes across developed and emerging markets outside the U.S.
As of the end of August, 39% of the fund was invested in developed Europe, followed by 32% in the developed Pacific, 21% in emerging markets and the rest peppered across the globe. Japan makes up the largest slice of the pie at 19.4% of assets, followed by the U.K. (8.5%) and Canada (7.8%). Large-caps account for roughly three-quarters of the fund's holdings, with the rest spread among mid-, small- and micro-cap stocks.
VSGX is as complete as global ESG coverage gets. All it costs is 0.15% annually.
Learn more about VSGX at the Vanguard provider site.
Total Assets: $680.7 million
Expense Ratio: 0.25%
As the trade war heated up over the summer, investors fled emerging-markets stocks. June's net capital outflows from EM stocks reached $35.8 billion – almost double what went out the door in May.
"Near term ... we remain underweight the EMs out of concerns about the current underlying fragile health of global trade, uncertainty over global growth, and ever-lingering trade tensions between the U.S. and its major trading partners," Joseph Quinlan, head of CIO market strategy for Merrill and Bank of America Private Bank, wrote in a private note to clients in August that Fortune viewed.
The U.S. might be considered a safer haven than EMs. But investors chasing growth may want to put a small portion of their funds in these countries' stocks. Yes, the growth in economies such as China might be slowing, but many emerging markets are expanding at a much better clip than developed markets.
The iShares ESG MSCI EM ETF (ESGE, $32.47) tracks the performance of the MSCI Emerging Markets Extended ESG Focus Index – a subset of stocks selected from a larger, market capitalization-weighted parent index that have favorable ESG characteristics and perform similarly to the parent index.
Twenty-three countries are represented, with China (29.2%), Taiwan (12.8%) and South Korea (12.1%) atop the geographical concentrations.
The fund isn't particularly top-heavy, either. The top 10 holdings only account for about 25% of the portfolio, providing plenty of diversification among the remaining 300 or so emerging-markets stocks.
The price is attractive too. The fund's 0.25% in annual expenses are far less than the ubiquitous iShares MSCI Emerging Markets ETF (EEM, 0.67%), and competitive with many other options. However, it still is more expensive than the company's low-cost EM fund, the iShares Core MSCI Emerging Markets ETF (IEMG, 0.14%).
Learn more about ESGE at the iShares provider site.
Total Assets: $151.1 million
Expense Ratio: 0.40%
As more investors jump on the ESG bandwagon, additional ETFs are launching to meet increased demand across all the market's corners.
The Nuveen ESG Small-Cap ETF (NUSC, $28.52), launched in December 2016, is one of the few ESG ETFs helping investors to inject responsibility into their small-company exposure.
NUSC tracks the performance of the TIAA ESG USA Small-Cap Index, a group of small- and mid-cap stocks that adhere to basic ESG screening criteria. Companies excluded from the fund include those participating in the manufacture or sale of alcohol, tobacco, military weapons, firearms, nuclear power and gambling.
Despite the "small-cap" name, 46% of the fund is invested in mid-cap stocks. Still, the largest portion of the fund (49%) is in small-caps, and the rest is in even-smaller micro-cap companies. Five sectors – information technology, industrials, financials, health care and consumer discretionary – boast weights of between 13% and 18%.
The ETF's turnover is 54%, which means it replaces its entire 640-stock portfolio every two years. That amount of trading does tend to drive up trading costs, which can weigh on performance. It also costs 0.40% in annual fees, which is more than double the popular iShares Russell 2000 ETF (IWM).
But Nuveen's ESG ETF has accumulated more than $150 million in net assets in its short time on the market. And it has rewarded its investors for their leap of faith, generating 19.6% in total returns since inception versus 10.6% for the IWM. That more than makes up for the higher management fee.
Learn more about NUSC at the Nuveen provider site.
Total Assets: $6.2 million
Expense Ratio: 0.76%
The #MeToo movement has put diversity-focused ESG ETFs such as the Impact Shares YWCA Women's Empowerment ETF (WOMN, $20.58) in the spotlight.
WOMN tracks the Morningstar Women's Empowerment Index, which provides broad-market exposure to mid- and large-cap stocks in much the same way the Russell 1000 Index does, with a significant twist. The ETF, launched in August 2018, uses data from Equileap – an organization that promotes gender diversity and equality in the workplace – to include companies that align with the YWCA's vision for how companies can advance women's empowerment.
Equileap uses 19 criteria to determine what constitutes gender equality, including gender balance in leadership and the workforce, equal compensation and work-life balance, policies promoting gender equality, and commitment to transparency and accountability.
The ETF currently owns a total of 220 stocks, with about a third of the weight concentrated in top-10 holdings such as Amazon.com (AMZN), JPMorgan Chase (JPM) and Verizon (VZ). Like many ESG funds, WOMN is heavy in technology companies (27.9%). It also dedicates 14.4% of the portfolio to financial-services companies, and another 13.4% to health-care firms.
The fund does charge an expensive 0.76% annually. However, Impact Shares is a 501(c)(3) nonprofit organization that donates all net advisory fees from its management of the fund to the YWCA. Very few ETFs go as far as WOMN in walking the walk.
Just note that its assets are a low $6.2 million. If a fund has perpetually low assets, it might not be sustainable, and the provider might be forced to close it. However, WOMN has only been on the market since August 2018, and its assets are trending higher, not lower. It just needs time.
Learn more about WOMN at the Impact Shares provider site.
Total Assets: $4.8 million
Expense Ratio: 0.45%
The Columbia Sustainable International Equity Income ETF (ESGN, $24.14) is in a worse place, assets-wise. That's unfortunate, because ESGN is among the more interesting ESG ETFs out there.
Columbia Threadneedle Investments, a business with $468 billion in assets under management, specializes in "strategic beta" solutions – essentially, trying to outdo traditional market-cap-weighted indexes by identifying factors that reduce risk and increase return. Its ESGN is an international fund that looks for high-quality stocks that also have lower-than-average volatility and have historically outperformed the broader markets. In addition to all that, it homes in on companies that are financially stable enough and generate enough cash flow to support future dividends.
And, most importantly, because it is an ESG-focused ETF, it strives to invest in those companies who adhere to ESG standards.
The result is a tight portfolio of just 100 large- and mid-cap companies from developed international markets. It's also extremely overweight Japan, which makes up 41% of the fund. (Germany is next, at nearly 9%.)
Despite a laser focus on quality, ESGN has had a rough go. While it accumulated almost $17 million in assets at its peak in 2018, much of that exited during the tumultuous fourth quarter. The ETF now has less than $5 million in assets more than three years in, and it trades at a very low volume of just a few thousand shares per day – sometimes less. So if you do take the plunge, keep a close eye on its assets situation and use limit orders to make sure you get in and out at the price you're looking for.
Learn more about ESGN at the Columbia Threadneedle provider site.
Total Assets: $97.5 million
Expense Ratio: 0.10%*
Bonds have taken a lot of abuse in recent years. However, a potential slowdown in global growth, along with interest-rate cuts by numerous central banks across the world, has prompted many investors to move some of their capital into fixed income.
In August, the Bank of America Merrill Lynch Manager Survey found that 43% of market professionals expected lower short-term rates over the next 12 months, compared to just 9% expecting higher long-term rates. (Bond prices rise as bond yields fall.)
Given the bullish outlook for bonds, the iShares ESG U.S. Aggregate Bond ETF (EAGG, $54.28) might become even more popular with investors.
The EAGG tracks the performance of the Bloomberg Barclays MSCI US Aggregate ESG Focus Index, which invests in U.S. dollar-denominated, investment-grade bonds issued by companies deemed by MSCI ESG Research to have favorable environmental, social and corporate governance practices.
Like many ESG ETFs, iShares' bond offering is a youngster, getting its start in October 2018. But it's doing a fantastic job of attracting assets, and it sits near the $100 million mark at the moment.
EAGG's roughly 740 holdings include a large slab of U.S. Treasury bonds (roughly 40%), as well as large weightings in mortgage-backed securities (28%) and corporate bonds (26%). The portfolio has an effective duration – a measure of sensitivity to interest rates – of 5.5 years. This means that if interest rates rise by 1 percentage point, the fund should lose 5.5% of its value. The average weighted maturity of EAGG's bonds is close to eight years, which is considered intermediate-term.
This fairly high-credit-quality fund offers a modest 2.1% yield.
* Includes a 1-basis-point fee waiver good through June 30, 2024.
Learn more about EAGG at the iShares provider site.