More and more investors are making ethical practices a high priority when choosing stocks. People want their investments to generate big returns, but they also want to support companies that act in a responsible, sustainable and fair manner. In a world that is increasingly socially aware and interconnected, investors are more likely to find value in stocks and funds that specifically address environmental, social and governance (ESG) issues, as they are called. This focus is gaining popularity in boardrooms and among fund managers, and we should expect it to be a trend in the stock market in the coming years.
If ethical investment is interesting for you, consider adding these three ETFs to your portfolio.
IShares ESG Aware MSCI USA ETF
O IShares ESG Aware MSCI USA ETF (NASDAQ: ESGU) accompanies an index of companies focusing on ESG in the United States. The index is made up of shares with good scores on factors such as carbon emissions, waste, labor relations, ethical purchases, security, corruption and anti-competitive practices. The fund also excludes tobacco producers, certain arms manufacturers and other controversial companies.
The fund is passively weighted to simulate market performance, while focusing on around 350 companies with sufficient ESG scores. The resulting portfolio is strongly focused on technology stocks, which represent around 35% of the total stakes.
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Investors will be pleased to find that this niche ETF maintains a reasonable expense ratio of 0.15% and good liquidity. The average daily trading volume is over $ 50 million, which is not necessarily the highest, but it is still sufficient for most investors to avoid illiquidity problems. Specifically, a 0.04% bid-ask spread is low enough not to increase trading costs and impair returns.
IShares ESG Aware MSCI EM ETF
O IShares ESG Aware MSCI EM ETF (NASDAQ: ESGE) it is very similar to the aforementioned American version, but only holds shares in emerging markets. The screening methodology applied to a larger universe of international actions results in approximately the same number of participations, but with slightly different concentrations. Technology is again strongly represented with more than 40% of the portfolio, but finance also represents a considerable 22%. The fund’s holdings are also heavily concentrated in Taiwan, Hong Kong, South Korea, China and India, which together account for about 75% of the total allocation.
IShares’ ESG emerging markets fund carries a slightly higher expense rate of 0.25%, but this is not prohibitive for investors who like the approach. Despite being a smaller fund than its cousin focused on the United States, the emerging markets ETF has a similar daily trading volume and a tight bid-ask spread, providing ample liquidity for most investors. It should be easy and inexpensive to purchase or download in a timely manner.
Vanguard US ESG Stock ETF
O Vanguard ESG US Stock ETF (NYSEMKT: ESGV) is Vanguard’s biggest offering to compete with previous ones, with almost $ 3 billion of assets under management. This fund accompanies a different index, the FTSE US All Cap Choice Index, which results in a slightly different composition. The portfolio excludes sectors such as alcohol, tobacco and weapons, but goes further by omitting fossil fuels, nuclear energy, gambling and adult entertainment. The methodology also examines companies that use UN standards for labor rights, environmental management and corruption.
Aiming at all market capitalizations, the fund ends up holding about 1,500 different shares. Despite this extra diversification, it is still weighted by market value, which means it is still dominated by the same handful of the largest companies as the iShares US fund above. Its exposure in the sector is also very similar.
Vanguard offers this investment option at a very reasonable expense rate of 0.12%, therefore, erosion of return should be minimal. Investors are expected to recognize the significantly lower daily trading volume of just $ 22 million, with a slightly higher bid-ask spread of 0.06%. This is by no means prohibitive and should provide ample liquidity and marketability for most holders, but it is worthy of consideration.
Is ESG right for you?
Some critics may argue that ESG funds are the product of a long-term bull market, causing investors to consider guaranteed returns. If ESG proves to be a fad, the above ETFs may lose popularity and have a lower trading volume.
However, record inflows to sustainable funds in the first quarter of 2020 may suggest otherwise. After a tumultuous and stressful year, ethics are more important now for many investors. It depends on whether or not you consider ESG ratings when allocating your money, but this is a great place to start for interested investors.