An ESG ETF is designed to focus on the environmental, social, and governance factors of each company in the fund.
According to Morningstar data, funds that seek to incorporate information on an investment’s sustainability and overall societal impacts – and select from those that meet specific criteria – have largely outperformed their traditional counterparts over the ten years.
The rising popularity of ESG ETFs
Vanguard, as the second-largest ETF provider, has been adding more ESG funds into its menu of options.
Their first ESG ETF in the US was launched in 2020. In addition, they’ve hired a new ESG product category team to help meet the rising demand for ESG.
In total, there are now more than 600 ESG funds and ETFs available to US investors. Overall, they involve nearly $200 billion in assets under management. Equities dominate the total assets, but fixed income ESG ETFs can be found as well and are among the most in-demand.
Many of these ESG ETFs are actively managed funds. But many passively track indices with securities that don’t meet certain ESG criteria filtered out.
For example, many companies that are involved in the production of crude oil and tobacco products may not make the cut.
Popular ESG indices include the:
- S&P 500 ESG Index
- FTSE Global Choice Index Series
Popular ESG ETFs
1) FPE – The largest ESG ETF is the First Trust Preferred Securities & Income ETF. FPE combines preferred shares and fixed income, which provides returns with less volatility than traditional equity securities.
2) SPYX – SPDR S&P 500 Fossil Fuel Reserves Free ETF (the S&P 500 without oil and gas companies, leaving about 460 companies total)
3) SUSA – iShares MSCI USA ESG Select ETF (S&P 500 with stringent criteria that excludes about 70 percent of the companies)
4) WWJD – Inspire International ESG ETF
5) ESGD – iShares ESG MSCI EAFE ETF (excludes US and Canada to balance geographic exposure)
6) ESGN – Columbia Sustainable International Equity Income ETF
7) ESGV – Vanguard ESG US Stock ETF
8) GRID – First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund
9) DSI – iShares MSCI KLD 400 Social ETF (biased toward technology stocks)
10) SHE – SPDR SSGA Gender Diversity Index ETF (focuses on companies with better-than-average female representation among its executive committees)
11) TAN – Invesco Solar ETF
ESG ETFs are part of gaining broad access to the socially responsible investing (SRI), or impact investing, trend.
According to a Morgan Stanley survey of high net worth investors, 95% of millennials are interested in sustainable investing.
But this trend isn’t solely driven by goodwill.
A Nielsen study found that sustainable products had better growth than non-sustainable counterparts across all product categories.
How the assets in a portfolio interact with the world more broadly and drive real-world outcomes are important considerations for understanding its overall risk and return profile.
ESG investments are already common in certain markets. For example, in Australia and New Zealand, they account for around two-thirds of all professionally managed assets.
Read more: ESG: An Overview of Impact Investing