Impact investing is growing in terms of popularity as investors become more socially conscious. As a result, more and more ETFs adhering to environmental, social and governance (ESG) investing principles keep popping up.
Over the past three years, more than 50 ESG funds launched as fund issuers target segments ranging from domestic small caps to international equities to bonds.
“ETFs are beginning to reach parity with open-end funds in the ESG space,” said Morningstar in a recent note. “The ETF universe of sustainable funds attracted more than $2 billion in net flows last year, doubling its 2017 total and setting a record for the past decade.”
Today, there are 208 ESG ETFs listed around the world, but confusion lingers regarding what exactly makes socially responsible funds socially responsible.
“Confusion persists around what constitutes an ESG fund. According to PRI, a UN-supported initiative which seeks to understand the investment implications of ESG issues, 56 per cent of adopters believe there is a lack of clarity in ESG definitions,” according to ETFGI, a London-based ETF research firm. “ETFGI’s classification system attempts to provide greater precision, with ETFs/ETPs listed globally organised into categories, including core ESG products and theme-based groups, such as Clean/Alternative Energies and Gender Diversity.”
If you’re looking to get into impact investing through socially responsible funds may want to consider the following ETFs.
iShares MSCI KLD 400 Social ETF (DSI)
Expense ratio: 0.25% per year, or $25 on a $10,000 investment.
With $1.28 billion in assets under management, the iShares MSCI KLD 400 Social ETF (NYSEARCA:DSI) is the largest passively managed socially responsible fund in the U.S. At just over 12 years old, DSI is also one of the oldest ESG ETFs. This socially responsible fund targets the MSCI KLD 400 Social Index.
“ESG metrics help investors evaluate companies based on environmental, social, and governance risks and opportunities — and the companies’ ability to manage them,” according to iShares.
As an older socially responsible fund, DSI’s screening process is prosaic and standard. That is not necessarily a bad thing, but with old-guard socially responsible funds, the typical companies that are excluded are primarily alcohol and tobacco firms, makers of civilian firearms, gambling companies and those firms engaged in the adult entertainment business, among others.
DSI’s MSCI ESG coverage is almost 100% and its MSCI ESG Quality score peer rank is 98.61%, according to issuer data.
Xtrackers MSCI ACWI ex USA ESG Leaders Equity ETF (ASCG)
Expense ratio: 0.16% per year, or $16 on a $10,000 investment.
Let’s go from one of the oldest socially responsible funds in DSI to one of the newest with the Xtrackers MSCI ACWI ex USA ESG Leaders Equity ETF (NYSEARCA:ASCG) — which debuted last December.
As its name implies, this socially responsible fund excludes U.S. equities. Even with that restriction, ASCG holds nearly 800 stocks. This socially responsible fund follows the MSCI ACWI ex USA ESG Leaders Index and can be seen as an ESG alternative to traditional ex-U.S. strategies.
This socially responsible fund mixes developed and emerging markets, but leans heavily toward the former. Asian and European equities combine for 87.40% of ASCG’s weight and the fund is cost-effective relative to other impact investing options.
SPDR SSGA Gender Diversity Index ETF (SHE)
Expense ratio: 0.20% per year, or $20 on a $10,000 investment.
In the universe of impact investing, gender-equality products are among the fastest-growing. The SPDR SSGA Gender Diversity Index ETF (NYSEARCA:SHE) is proving there is merit to the gender equality investment thesis.
SHE, which is almost three years old, has $235.72 million in assets under management. This socially responsible fund tracks the SSGA Gender Diversity Index.
That benchmark “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 State Street.
Healthcare, financial services and technology stocks combine for almost 47% of SHE’s weight. The fund is up almost 41% since inception, but that trails the S&P 500.
Global X Conscious Companies ETF (KRMA)
Expense ratio: 0.43% per year, or $43 on a $10,000 investment.
The Global X Conscious Companies ETF (NASDAQ:KRMA) is almost three years old and uses one of the more unique methodologies when it comes to impact investing.
“As the first ETF to utilize the Multi-stakeholder Operating System (MsOS), 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.
KRMA holds 160 stocks, none of which command weights north of 0.72%. Over 48% of this socially responsible fund’s weight is allocated to the technology, healthcare and financial services sectors. Over the past year, KRMA is beating the S&P 500 by 208 basis points.
Vanguard ESG U.S. Stock ETF (ESGV)
Expense ratio: 0.12% per year, or $12 on a $10,000 investment.
The Vanguard ESG U.S. Stock ETF (CBOE:ESGV) is one of two impact investing ETFs launched last September by Vanguard — a move that some socially responsible fund observers thought would spur increased interest in ESG ETF space.
As is the case with a slew of other Vanguard products, ESGV is cost-effective. With an annual fee of 0.12%, this socially responsible fund is cheaper than 87% of competing strategies. The fund holds nearly 1,600 stocks.
ESGV “excludes stocks of companies in the following industries: adult entertainment, alcohol and tobacco, weapons, fossil fuels, gambling, and nuclear power,” according to Vanguard.
Many ESG ETFs have struggled to attract assets, but ESGV is off to a solid start with nearly $111 million in assets under management as of the end of 2018.
Vanguard ESG International Stocks ETF (VSGX)
Expense ratio: 0.15% per year, or $15 on a $10,000 investment.
The Vanguard ESG International Stocks ETF (CBOE:VSGX) is the international counterpart to the aforementioned ESGV.
ESGV follows the same exclusion guidelines as VSGX. The international impact investing fund also “excludes stocks of companies that do not meet standards of U.N. global compact principles and companies that do not meet diversity criteria,” according to Vangaurd.
Home to 1,940 stocks, VSGX is a blend of developed and emerging markets though the latter represent just 17.60% of the fund’s weight. Japan and the U.K. combine for 29% of this socially responsible fund’s geographic exposure. Year-to-date, VSGX is performing inline with the MSCI ACWI ex USA Index.
NuShares ESG Large-Cap Value ETF (NULV)
Expense ratio: 0.35% per year, or $35 on a $10,000 investment.
The NuShares ESG Large-Cap Value ETF (BATS:NULV) hails from an expansive family of socially responsible funds offered by NuShares. NULV and the related NuShares ESG ETFs “include some kind of screen that specifically avoid companies with controversial practices or industries that may cause significant social harm, such as gun manufacturers,” according to ETF Trends.
Like more traditional value ETFs, this socially responsible fund features a large weight to financial services stocks (21.40%). The healthcare and consumer staples sectors combine for 29% of NULV’s weight. Six of the fund’s top 10 holdings are members of the Dow Jones Industrial Average.
Value stocks lagged growth names for almost all of the recent U.S. bull market, but with the S&P 500 Value Index up nearly 10% this year, NULV is a socially responsible fund that could be poised to deliver this year as investors favor more defensive strategies.
Todd Shriber does not own any of the aforementioned securities.
