More investors are examining socially responsible investing (SRI) strategies, including funds adhering to environmental, social and governance (ESG) investing principles.
Data suggest an increasing amount of market participants are mulling ESG investing. Just a few years ago, barely more than a third of investors considered ESG investing, but today, that number is close to half and it is even higher among the coveted millennial category.
“Over the past several years, ESG investing has garnered considerable media attention and increased interest among investors,” according to Oppenheimer research. “But many investors and even some advisors are still not exactly sure what ESG investing constitutes, and a lack of standardization in the terms and methodologies used with this type of investing only adds to the confusion. There are also doubts about whether ESG-focused portfolios can deliver strong returns, as many skeptics still believe that focusing on any non-economic attributes of a company can hinder performance.”
Exchange-traded funds (ETFs) represent convenient, efficient avenues to ESG investing. There are approximately 70 such funds currently trading in the U.S. Here are a few ideas to help investors get started with ESG investing.
Best ETFs for ESG Investing: Oppenheimer ESG Revenue ETF (ESGL)
Expense Ratio: 0.40% annually, or $40 per $10,000 invested
The Oppenheimer ESG Revenue ETF (NYSEARCA:ESGL) “provides access to the top 50% of securities in the S&P 500 by ESG score, excluding those with a detrimental score for controversies, and is weighted by top line revenue instead of market capitalization,” according to Oppenheimer.
The bulk of the fund’s 232 holdings are U.S. large-caps, including AT&T Inc. (NYSE:T), Intel Corporation (NASDAQ:INTC) and Microsoft Corporation (NASDAQ:MSFT). As an ESG investing strategy, ESGL is predictably light on the energy and materials sectors. ESGL, which uses a revenue-weighted methodology to weigh its components, is also underweight financial services stocks relative to the S&P 500.
“Beyond the environmental concerns, social and corporate governance issues are also becoming ever more important,” said Oppenheimer. “Populations around the world are aging. Some areas are being affected by mass migration and food and water shortages. Inadequate and undisclosed corporate governance standards have sometimes led to extensive corruption that brings significant harm to companies’ investors, employees, and consumers.”
ESGL is up 8.5% over the past six months.
Best ETFs for ESG Investing: SPDR SSGA Gender Diversity Index ETF (SHE)
Expense Ratio: 0.20%
One of the major frontiers within ESG investing is gender diversity. The SSGA Gender Diversity Index ETF (NYSEARCA:SHE), which turned two years old earlier this year, capitalizes on that theme. SHE tracks the SSGA Gender Diversity Index.
That index “seeks to minimize variations in sector weights compared to the composition of the index’s broader investment universe by focusing on companies with the highest levels within their sectors of senior leadership gender diversity,” according to SHE’s issuer.
Importantly, SHE is not a gimmick fund. Scores of academic research confirm the notion that publicly traded companies with above-average gender diversity, including women in prominent executive roles, outperform their less diverse peers.
Investors have embraced SHE as an ESG investing alternative as highlighted by its more than $322 million in assets under management. SHE has returned nearly 36% since inception.
Best ETFs for ESG Investing: Global X Conscious Companies ETF (KRMA)
Expense Ratio: 0.43%
With ESG investing expanding, investors should remember the funds populating this space are rarely similar to each other. The Global X Conscious Companies ETF (NASDAQ:KRMA) proves as much.
“KRMA offers exposure to companies achieving positive outcomes for 5 key stakeholders: Customers, Suppliers, Stock & Debt Holders, Local Communities, and notably, Employees,” according to Global X.
Relative to older ESG investing strategies, KRMA is picky about the stocks it holds, giving it a somewhat focused roster of 141 holdings. This ESG investing idea has a growth feel as the technology and consumer discretionary sectors combine for nearly 35% of its weight. KRMA is underweight energy and financial names relative to the S&P 500.
This ESG investing ETF is up more than 13% over the past 12 months with comparable volatility to the S&P 500.
Todd Shriber did not hold a position in any of the aforementioned securities.
