More and more investors are giving ethical practices a high priority for equities. People want their investments to yield good returns, but they also want to support companies that act responsibly, sustainably and fairly. In a world that is increasingly socially aware and interconnected, investors are finding more value in equities and funds that specifically address environmental, social and governance (ESG) issues, as they are called. This focus is becoming popular in management rooms and among fund managers, and we can expect it to be a trend in the stock market over the next few years.
If ethical investing is of interest to you, consider adding these three ETFs to your portfolio.
iShares ESG Aware MSCI USA ETF
The iShares ESG Aware MSCI USA ETF (NASDAQ: ESGU) follows an index of ESG-focused companies in the United States. The index is composed of equities that earn good marks on factors such as carbon emissions, waste, labor relations, ethical procurement, safety, corruption and competitive competition. The fund also excludes tobacco producers, certain arms manufacturers and other controversial companies.
The fund is weighted passively in a way that is intended to mimic market performance, while focusing on the approximately 350 companies with adequate ESG scores. The resulting portfolio is heavily weighted in technological equities, representing approximately 35% of total equities.
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Investors will be delighted to find that this niche ETF maintains a reasonable expense ratio and good liquidity. The average daily trading volume is over $ 50 million, which is not necessarily the highest, but is still sufficient for most investors to avoid illiquidity issues. Specifically, a bid-and-demand spread of 0.04% is low enough not to increase trading costs and chew returns.
iShares ESG Aware MSCI EM ETF
The iShares ESG Aware MSCI EM ETF (NASDAQ: ESGE) is very similar to the above US version, but it only holds shares of emerging markets. The screening methodology applied to a larger universe of international equities results in approximately the same number of businesses, but with slightly different concentrations. Tech is again strongly represented with more than 40% of the portfolio, but finances also make up a solid 22%. The fund’s equities are also strongly concentrated in Taiwan, Hong Kong, South Korea, China and India, which together account for about 75% of the total allotment.
The ESG fund of iShares’ emerging markets carries a slightly higher 0.25% expense ratio, but this does not prohibit costs for investors who like the approach. Despite being a smaller fund than its cousin in the US, emerging markets have a similar daily trading volume and a tight spread of bid-ask, providing enough liquidity for most investors. It should be easy and cheap to purchase or download on time.
Vanguard US ESG Stock ETF
The Vanguard ESG US Equity ETF (NYSEMKT: ESGV) is Vanguard’s largest offering to compete with the above, with nearly $ 3 billion in assets under management. This fund follows another index, the FTSE US All Cap Choice Index, which results in a slightly different composition. The portfolio excludes industries such as alcohol, tobacco and weapons, but goes further to exclude fossil fuels, nuclear energy, gambling and adult entertainment. The methodology also examines companies using UN standards for labor rights, environmental governance and corruption.
By targeting all market capitalizations, the fund holds nearly 1,500 different stocks. Despite this extra diversification, it is still weighting the market value, meaning it is still dominated by the same handful of the largest companies as the iShares US fund above. Its sector exposure is also very much the same.
Vanguard offers this investment option at a very reasonable expense ratio of 0.12%, so the erosion of returns should be minimal. Investors should recognize the significantly smaller daily trading volume of only $ 22 million, with a bid-ask spread of 0.06%. It is by no means priceless and should provide sufficient liquidity and tradability for most holders, but it should be considered.
Is ESG right for you?
Some critics may think that ESG funds are a product of a long-term bull market that causes investors to take returns for granted. If ESG turns out to be a fad, the above ETFs could become popular and experience a lower trading volume.
However, record flows to sustainable funds in the first quarter of 2020 may indicate otherwise. On the back of a turbulent and stressful year, ethics is now more important to many investors. It depends on you whether you should consider ESG ratings when allocating your money, but this is a great place to start for interested investors.