5 of the Best Socially Responsible ETFs to Buy

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socially responsible ETFs - 5 of the Best Socially Responsible ETFs to Buy

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The move to socially responsible and environmental, social and governance (ESG) investing principles is still in its early innings, but this year, socially responsible ETFs are attracting assets and strutting their stuff.

In the U.S., there are nearly 100 socially responsible ETFs with almost $30 billion in combined assets under management. Alright, so $30 billion spread across roughly 100 funds doesn’t sound like much. After all, there are five exchange-traded funds with $100 billion apiece, but the ideas behind socially responsible and ESG investing are only recently generating buzz.

Speaking of buzz, BlackRock, one of the largest issuers of socially responsible ETFs, expects that as more investors realize ESG can positively affect returns, related ETFs and indexs will vault to $1 trillion in assets under management by 2030.

With the move to socially responsible ETFs on, here are some key names to consider:

  • Xtrackers MSCI U.S.A. ESG Leaders Equity ETF (NYSARCA:USSG)
  • Xtrackers S&P 500 ESG ETF (NYSEARCA:SNPE)
  • Nuveen ESG Small-Cap ETF (CBOE:NUSC)
  • iShares ESG MSCI USA Leaders ETF (NASDAQ:SUSL)
  • iShares MSCI KLD 400 Social ETF (NYSEARCA:DSI)

Let’s take a deep dive into what makes each stand out among the crowd.

Socially Responsible ETFs to Buy: Xtrackers MSCI U.S.A. ESG Leaders Equity ETF (USSG)

Expense Ratio: 0.10%, or $10 annually per $10,000 invested

The Xtrackers MSCI U.S.A. ESG Leaders Equity ETF is one of the true success stories in the socially responsible ETF space. At just over a year old, USSG has $1.65 billion in assets under management. Not only does that make it one of the most successful ETFs that launched last year, it makes USSG the sixth-largest ESG ETF overall and the only one among the top seven that’s not an iShares product.

USSG tracks the MSCI USA ESG Leaders Index, one of the more widely observed ESG benchmarks. As is the case with many ESG funds, USSG overweights technology stocks relative to broader indexes, such as the S&P 500 and the Russell 1000. To be precise, USSG’s technology weight is 27% and that difference relative to, say, the S&P 500, is meaningful. Over the past 12 months, USSG is higher by 5.8% compared to 4.1% for the S&P 500.

Additionally, USSG charges just 0.10% per year, making it one of the least expensive funds in the socially responsible category.

Xtrackers S&P 500 ESG ETF (SNPE)

Expense Ratio: 0.11% per year

The Xtrackers S&P 500 ESG ETF is the one ESG ETF that follows the S&P 500 ESG Index — the ESG offshoot of the famed domestic equity benchmark. And no, those indexes aren’t mirror images of each other as highlighted by the fact SNPE holds 312 stocks.

The overlap by weight between SNPE and the S&P 500 is 74%, but sector drift in SNPE is almost 2% for technology and nearly 1.5% for consumer discretionary. In other words, SNPE is overweight stocks such as Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT), giving it out-performance potential.

SNPE’s index has a high bar for inclusion and doesn’t include all eligible candidates. Nor is the benchmark shy about excluding companies that don’t meet its criteria.

“Companies are excluded if they have a low ESG score relative to global industry peers, are involved in controversial weapons or tobacco, perform poorly on the principles of the UN Global Compact, or are involved in controversies deemed material to their ESG performance,” according to S&P Dow Jones Indices.

Nuveen ESG Small-Cap ETF (NUSC)

Expense Ratio: 0.40%

Socially responsible investing isn’t confined to large caps, as proven by the Nuveen ESG Small-Cap ETF. Home to $227 million in assets under management, NUSC is the biggest ESG small-cap ETF on the market. As of May 8, NUSC has 647 holdings, making for a relevant comparison with the S&P SmallCap 600 Index.

However, investors should expect different performances with that benchmark and the Nuveen fund because they share just 216 holdings and the overlap by weight is just 22%, according to the ETF Research Center (ETFRC).

Small caps are being taken to task on a year-to-date basis, but the group is showing some signs of life in recent weeks. Investors looking to capitalize on that resurgence may want to lean toward NUSC. The fund is overweight technology and healthcare resulting in a year-to-date out-performance of roughly 500 basis points over the S&P SmallCap 600 Index.

iShares ESG MSCI USA Leaders ETF (SUSL)

Expense Ratio: 0.10% per year

The iShares ESG MSCI USA Leaders ETF is the iShares rival to the aforementioned USSG as both funds follow the MSCI USA ESG Leaders Index. A 10.52% allocation to Microsoft is an obvious reason behind SUSL’s out-performance of broader equity benchmarks this year.

With SUSL, there are quantifiable metrics underscoring the fund’s socially responsible purview that extend beyond its underlying index. For example, the ETF’s ESG rating is AA with an ESG quality peer score of 98.90% and its ESG coverage is 99.15%, according to issuer data. Those percentages measure how SUSL stacks up on ESG metrics relative to other domestic large-cap equity funds.

Another benefit of funds such as SUSL is that the ESG methodology often steers investors to quality, stable companies, meaning these funds can and do perform less poorly when equities swoon. Companies that score well on sustainability metrics are often more profitable and less indebted than their rivals, according to BlackRock.

iShares MSCI KLD 400 Social ETF (DSI)

Expense Ratio: 0.25% per year

The iShares MSCI KLD 400 Social ETF turns 14 years old later this year, making it one of the oldest funds in the socially responsible ETF category. DSI follows the MSCI KLD 400 Social Index and features comparable ESG scores relative to its stablemate SUSL.

However, DSI takes its tech exposure to another level as that sector accounts for almost 31% of the fund’s weight. Not only is that above-average compared to broader benchmarks, its higher than the tech allocations found in many competing large-cap socially responsible ETFs.

Data confirm elevated tech exposure helps as DSI is topping the Russell 1000 by 400 basis points over the past three years. That answers a question vital to the long-term success of ESG funds: do these products offer the potential to outperform cap-weighted rivals?

“Track records of early sustainable indexes show comparable and sometimes superior returns versus their traditional market-weighted index counterparts,” according to BlackRock.

Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.

Todd Shriber has been an InvestorPlace contributor since 2014.


Article printed from InvestorPlace Media, https://investorplace.com/2020/05/5-best-socially-responsible-etfs-to-buy/.

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