This past month was the widely attended Inside ETFs conference, where news makers, asset managers and other key personnel in the ETF industry come to discuss a wide range of topics. Collectively, though, the hottest trend could be summed up in just three letters: E-S-G; To be more specific, ESG ETFs.
ESG ETFs, or those investing in environmental, social and environmental metrics, are quickly gaining popularity with both individual and institutional investors. The basics behind ESG ETFs is that investors have the ability to put their money where their values lie. This can be anything from avoiding certain sectors like energy or weapons manufacturers, to even looking at a whole host of various factors to craft a portfolio that suits their needs.
The best part is that after many years of chronic under-performance, ESG returns are starting to keep up; And, in many cases, outperform the broader market.
However, to quote analyst Ben Johnson of Morningstar, “My ESG is not your ESG is not my neighbor’s ESG.”
So, thanks to interest and the rising success of socially responsible investing (SRI), there are a plethora of ESG ETFs and mutual funds on the market. Nonetheless, the issue comes down to separating the wheat from the chafe and finding those funds that truly deliver on their ESG promise and goals.
Luckily, here at InvestorPlace, we’ve down much of the leg work for you. That said, here are three ESG ETFs that make great buys for investors looking to align their portfolios to their values.
ESG ETFs to Buy: iShares MSCI KLD 400 Social (DSI)
One of the oldest ESG ETFs still remains one of the best broad choices for investors looking to add a core fund to their portfolios. Launched in 2006, the iShares MSCI KLD 400 Social (NYSEARCA:DSI) has now amassed roughly $2 billion in assets and features swift trading volumes. And it’s easy to see why.
The ETF provides a broad overview of the entire market. DSI’s parent index includes 99% of all the stocks in the United States. This includes large-, mid- and small-cap firms. Index provider MSCI then kicks out all tobacco, gambling, firearms/weapons, nuclear power, adult entertainment and GMO seed producers. It then uses various SRI screens to weigh DSI’s holdings and create its underlying portfolio of around 400 stocks. Top holdings include Microsoft (NASDAQ:MSFT), Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL)
The thing to remember is that MSCI uses a variety of ESG screening methods when it comes to ESG, and weighs them according to sector and industry. Moreover, it looks at the total picture for a stock. So, while a firm may score low on social factors, it may be amazing on environmental ones. In turn, this could give it higher overall grade and allow it be included in DSI.
Overall, the proof of this system is in DSI’s returns. Over the last decade, the ESG ETF has managed to produce a great 12.55% annual total return. That’s not too shabby at all, and is on par with the broader market. Clearly, doing right by your portfolio can result in steady returns. And, with an expense ratio of just 0.25% — or $25 per $10,000 invested — it’s a pretty cheap option as well.
In the end, DSI makes a great core ESG fund for your portfolio.
SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX)
One of the biggest flash points for ESG and SRI continues to be climate change. With many investors looking to reduce their own carbon emissions or to avoid owning traditional fossil fuel producers, a variety of ESG funds are now available that bypass these stocks. That said, the SPDR S&P 500 Fossil Fuel Reserves Free ETF (NYSEARCA:SPYX) continues to be one of the best and easiest to understand.
SPYX simply tracks the S&P 500, and then kicks-out all the fossil fuel-related equites. With it, investors avoid oil producers, refineries, coal miners and similar commodity-based stocks. The best part is that SPYX still offers a ton of broad market exposure — and currently, it holds 484 different large-cap stocks.
That means investors are still able to get market-like returns without holding carbon emitters. In fact, at the end of 2019, SPYX still managed to produce a strong 32% return. That basically matches the market, and overcomes one of the biggest critiques of ESG ETFs, which is their potential under-performance.
All in all, SPYX allows investors to distinctly vote with their morals and still gain great returns. And, with nearly $500 million in assets and a low 0.20% expense ratio, it’s the top fund for those looking to avoid carbon investments.
Vanguard ESG International Stock ETF (VSGX)
ESG doesn’t just stop at the border of the United States. It turns out, many of the same reasons for choosing SRI investing here at home works well abroad. And in fact, many firms overseas — especially in developed Europe — score higher on ESG metrics than their U.S. counterparts. Why? Well, they’ve simply been doing it longer.
That said, tapping this potential for ESG overseas is the new Vanguard ESG International Stock ETF (BATS:VSGX).
As its name implies, VSGX tracks ESG firms in both developed and emerging markets. The ETF uses the FTSE Global All Cap exUS Choice Index. Here, the fund will kick-out adult entertainment, alcohol and tobacco, weapons, fossil fuels, gambling and nuclear power companies from its holdings. It then screens and excludes companies that don’t meet certain diversity standards, as well as United Nations criteria. Ultimately, it creates a very broad, yet powerful portfolio of more than 3,850 different international stocks. That’s more than half as much as non-ESG Vanguard Total International Stock ETF (NASDAQ:VXUS).
And yet, returns haven’t suffered with exclusions. In fact, VSGX has managed to outperform VXUS by 122 basis points over the last year. Here again, ESG ETFs don’t mean that investors need to suffer with low returns.
Furthermore, as a Vanguard ETF, VSGX is as low cost as they come. With expenses of just 0.17%, investors don’t need to worry about overcoming high costs in order to outperform. Overall, it’s just another great member of the ESG ETFs that investors should look to add to their portfolio.
At the time of writing, Aaron Levitt did not hold a position in any stock mentioned.