Interest and investment in ESG ETFs has soared over the past couple years. Here we'll explore the 6 best ESG ETFs for a more responsible investment portfolio in 2023.
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Introduction – What Is ESG Investing?
ESG investing refers to investing in companies that exhibit favorable characteristics related to Environmental, Social, and Governance issues. Interchangeable terms include socially responsible investing (SRI), sustainable investing, and impact investing.
Environmental criteria include:
- energy usage and conservation
- natural resources and land use
- waste production and disposal
- treatment of animals
Social criteria include:
- labor standards
- community impact
- employment opportunity
- employee health and safety
- production quality
Governance criteria include:
- transparent accounting and taxation
- shareholder voting rights
- political involvement
- business ethics
- board diversity
As concerns grow over things like gender equality and climate change, interest and investment in ESG-focused funds has soared in recent years. At the same time, costs for these funds have dropped and availability has increased. Indexes have emerged that essentially rank how ethically corporations operate. Index investors can now still access broad market exposure with a slight ESG tilt, excluding potentially controversial companies. The funds below track these indexes. Some ETFs go a step further and increase weighting to companies with higher-ranked ESG scores.
The theory is these companies may perform better in the future due to things like energy efficiency, employee productivity, and consumer preference. The potential outperformance of high-ESG-scoring companies is up for debate and is a large topic for another day, but regardless, you'll likely feel better knowing your investment portfolio matches your personal values.
Let's explore 6 of the best ESG ETFs to make your portfolio more responsible.
The 6 Best ESG ETFs
Some of the big names like iShares, Vanguard, WisdomTree, and others have come out with popular ESG ETFs.
ESGV – Vanguard ESG U.S. Stock ETF
The Vanguard ESG U.S. Stock ETF seeks to track the FTSE US All Cap Choice Index, providing broad U.S. market cap weighted exposure to companies that exhibit ESG criteria. The fund excludes companies related to adult entertainment, alcohol and tobacco, weapons, fossil fuels, gambling, and nuclear power, as well as firms that don't abide by the UN Global Compact principles in relation to labor rights, human rights, the environment, and anti-corruption. In this sense, think of ESGV as a way to access the broad U.S. stock market while simply excluding potentially controversial companies.
Note that this fund is naturally very tech-heavy at 38%. Investors may want to better diversify across sectors using other funds alongside this one. The fund is one of the most popular in this space with over $3 billion in assets. It has nearly 1,500 holdings and an expense ratio of only 0.12%.
SUSL – iShares ESG MSCI USA Leaders ETF
SUSL from iShares is similar to ESGV above, except it excludes small-caps and goes a step further in applying a more stringent screen for ESG scores, selecting only the highest-scoring U.S. companies in their respective sectors. Essentially, SUSL is taking the same companies as ESGV, ranking them, and dropping the lower-ranking firms. As such, SUSL has exhibited slightly lower volatility historically compared to ESGV, even though their sector exposure is nearly the same. Since it is more selective than ESGV, SUSL only has about 250 holdings, compared to nearly 1,500 for ESGV. ESGV's arguably greater diversification in that regard has resulted in greater performance historically compared to SUSL. SUSL is actually cheaper than ESGV with an expense ratio of only 0.10%. The fund seeks to track the MSCI USA Extended ESG Leaders Index.
VSGX – Vanguard ESG International Stock ETF
Those seeking broad global ESG exposure outside the U.S. may enjoy VSGX, the Vanguard ESG International Stock ETF. Like its U.S. counterpart ESGV, VSGX simply takes a broad market cap weighted stock index, in this case the FTSE Global All Cap ex US Choice Index, and applies an exclusionary screen based on controversial industries and U.N. standards. This ETF has over $1.5 billion in assets and an expense ratio of 0.15%.
ESGD – iShares ESG Aware MSCI EAFE ETF
The iShares ESG Aware MSCI EAFE ETF (ESGD) is one of the most popular ESG ETFs out there, with over $4 billion in assets. The fund provides broad global exposure to nearly 500 companies in developed markets outside the U.S. and Canada that exhibit high ESG scores. It has an MSCI ESG Fund Rating of AA based on a score of 8.25 out of 10. ESGD's top geographical exposures are Japan (25%), the UK (14%), and France (11%). This ETF seeks to track the MSCI EAFE Extended ESG Focus Index and has a relatively low expense ratio of 0.20%.
ESGE – iShares ESG MSCI EM ETF
ESGE is the Emerging Markets version of ESGD. Like the previous fund, ESGE takes a broad index and applies an exclusionary criteria for controversial firms, resulting in about 300 holdings spread mostly across China (39%), Taiwan (13%), and South Korea (12%). The fund seeks to track the MSCI USA Extended ESG Focus Index and is slightly more expensive than the previous funds with an expense ratio of 0.25%. Interestingly, ESGE is the most popular ETF on this list with over $7 billion in assets.
EAGG – iShares ESG Aware U.S. Aggregate Bond ETF
Those seeking a bond fund with an ESG tilt can utilize EAGG, the iShares ESG Aware U.S. Aggregate Bond ETF. This fund invests in U.S. investment-grade bonds from organizations determined to have favorable environmental, social and corporate governance practices, and also excludes controversial industries like tobacco and firearms. The resulting portfolio is mostly exposed for about 39% treasuries, 26% MBS, and 19% Industrial bonds. There is a small allocation to corporate bonds as well. The fund has an average effective duration of 6 years, making it classified as an intermediate term bond fund, and an expense ratio of 0.10%.
Where To Buy These ESG ETFs
All these ESG ETFs should be available at any major broker. My choice is M1 Finance. The broker has zero transaction fees and zero account fees, and offers fractional shares, dynamic rebalancing, and a modern, user-friendly interface and mobile app. I wrote a comprehensive review of M1 Finance here.
Disclaimer: While I love diving into investing-related data and playing around with backtests, this is not financial advice, investing advice, or tax advice. The information on this website is for informational, educational, and entertainment purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. I always attempt to ensure the accuracy of information presented but that accuracy cannot be guaranteed. Do your own due diligence. I mention M1 Finance a lot around here. M1 does not provide investment advice, and this is not an offer or solicitation of an offer, or advice to buy or sell any security, and you are encouraged to consult your personal investment, legal, and tax advisors. All examples above are hypothetical, do not reflect any specific investments, are for informational purposes only, and should not be considered an offer to buy or sell any products. All investing involves risk, including the risk of losing the money you invest. Past performance does not guarantee future results. Opinions are my own and do not represent those of other parties mentioned. Read my lengthier disclaimer here.
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