The coronavirus pandemic has increased awareness and consciousness toward sustainable investing, driving popularity of environmental, social and governance (ESG) funds. According to Morningstar, there were 534 index funds with focus on sustainability and overseeing a combined $250 billion as of the end of the second quarter of 2020, per a CNBC article. In fact, assets in sustainable index funds have quadrupled in the last three years in the United States and now make for 20% of the total, according to the same CNBC article.
Commenting on the growing popularity of ESG funds, Alex Bryan, Morningstar’s director of passive strategies research for North America, said that “there’s a great realization today that ESG issues are investment issues. They’re issues that can affect the bottom line, and that may not always be something that comes to bear immediately,” per a CNBC article. In fact, going by the same article, inflows into both active and passive ESG-focused funds together hit $71.1 billion during the second quarter, resulting in global assets under management crossing the $1-trillion mark for the first time.
Keeping up with the growing popularity of ESG investing, iShares recently introduced a new suite of ESG-screened ETFs that seek to track underlying indexes from S&P Dow Jones Indices. The launched ETFs are iShares ESG Screened S&P 500 ETF (XVV), iShares ESG Screened S&P Mid-Cap ETF (XJH) and iShares ESG Screened S&P Small-Cap ETF (XJR). In this regard, Armando Senra, head of iShares Americas, reportedly said, “sustainable investing was historically a values-based exercise – it has evolved into an investment risk and performance-based decision. Expanding our suite of sustainable funds is critical to help clients integrate ESG into their portfolios.” Also, it is worth noting here that iShares has already globally added 38 sustainable ETFs this year.
Meanwhile, Vanguard launched its first fixed income ESG ETF for U.S. investors, Vanguard ESG U.S. Corporate Bond ETF (VCEB).
New ESG ETFs in a Nutshell
According to iShares, it’s new range of ETFs are segregated from prevailing solutions by combining access to major benchmark exposures of the S&P 500, 400 and 600 with business involvement screens to assist investors ignore companies with specific levels of involvement in some industries such as fossil fuels, tobacco, small arms and controversial weapons.
XVV charges a fee of 8 basis points (bps) a year. XJH and XJR have the same expense ratio of 12 bps.
Vanguard’s VCEB ETF will seek to track the performance of the Bloomberg Barclays (LON:BARC) MSCI U.S. Corporate SRI Select Index. The index includes U.S. dollar-denominated, investment-grade, fixed-rate, taxable corporate bonds with maturities of more than a year that are then screened by MSCI for certain ESG criteria. The exclusionary screening process, includes removing bonds of companies that the index provider determines are involved in, and/or derive threshold amounts of revenue from, certain activities of business segments related to gas, oil, adult entertainment, tobacco and so on, along with other screens. VCEB also charges an expense ratio of 12 bps.
What Makes ESG Funds an Attractive Pick?
Increasing awareness about ESG funds among companies marked by continued technological advancement and digital revolution has been observed since the pre-pandemic era. Notably, ESG investing has shown some resilience and continues to gain investor attention amid the coronavirus pandemic.
ETF Competition
The fund faces tough competition owing to its focus on U.S. companies with good ESG ratings. Below we discuss a few ETFs that seek to provide exposure to ESG investing:
iShares ESG Aware MSCI USA ETF ESGU
The fund seeks similar risk and return to the MSCI USA Extended ESG Focus Index, while achieving more sustainable outcome. The fund provides exposure to higher-rated ESG companies, while accessing large and mid-cap U.S. stocks. The fund charges 15 bps in fees (read: Beat the Fed Minutes Blues With These ETF Areas).
Xtrackers MSCI USA ESG Leaders Equity ETF USSG
The fund tracks investment results that correspond generally to the performance of the MSCI USA ESG Leaders Index. Notably, the MSCI USA ESG Leaders Index provides exposure to companies with high ESG performance relative to their sector peers. The fund charges 10 bps in fees (read: Ride the Thematic Investing Trend With These ETFs).
Vanguard ESG U.S. Stock ETF ESGV
The fund tracks the performance of the FTSE US All Cap Choice Index comprising large, mid, and small-capitalization stocks. It does not include companies operating in adult entertainment, alcohol and tobacco, weapons, fossil fuels, gambling and nuclear power industries. It also doesn’t consider companies which do not meet the U.N. global compact principles and diversity criteria. It charges 12 bps in fees (read: Here's Why ESG ETFs Are Hot Amid Pandemic).
Nuveen ESG Large-Cap Growth ETF NULG
The underlying TIAA ESG USA Large-Cap Growth Index comprises large-cap equity securities and meets ESG criteria and exhibits overall growth style characteristics based on long-term forward EPS growth rate, short-term forward EPS growth rate, current internal growth rate, long-term historical EPS growth trend and long-term historical sales per share growth trend. It charges 35 bps in fees.
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Nuveen ESG LargeCap Growth ETF (NULG): ETF Research Reports
iShares ESG MSCI USA ETF (ESGU): ETF Research Reports
Vanguard ESG U.S. Stock ETF (ESGV): ETF Research Reports
Xtrackers MSCI USA ESG Leaders Equity ETF (USSG): ETF Research Reports
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