Socially Responsible Exchange Traded Funds
With what seems like a never-ending flow of new Exchange Traded Fund options for investors to dump money into, one of the more popular, besides indexing, themes are the ‘socially responsible’ exchange traded funds.
These funds focus on companies which are seen to be socially responsible. That could and often does mean many things, but for the most part, it represents companies which rate high on environmental, social, and corporate governance scales.
Firm meeting the environmental, social, and governance (ESG) criteria are also believed to have higher rates of return for investors because these companies are less likely to deal with government-imposed fines or just plain old bad publicity. But socially responsible ETF investing just doesn’t end with the ESG firms; it often excludes all companies that fall into the ‘sin stock’ categories. These would include, alcohol, tobacco, gambling, adult entertainment, weapons, and obviously now the marijuana companies. One ETF, which we will get to in just a moment even goes as far as focusing on companies which employ women in high-level leadership positions.
So, before you decide that socially responsible is just for ‘tree huggers’ and isn’t for you, take a look at a few of the ETFs I have highlighted below, and maybe one of them will strike a chord with you.
The first ETF on my list is the iShares MSCI KLD 400 Social ETF (NYSEARCA:DSI) which is one of the oldest ESG ETFs with an inception date of November 4th, 2006. Due to its long history, it is also one of the largest ESG funds with $1.4 billion in assets under management. However, DSI is in the middle of the range in terms of costs, as the fund carries an expense ratio of 0.25%. DSI tracks a market-cap-weighted index of 400 companies which are considered to have the highest positive environmental, social, and governance characteristics by MSCI. With that being said, Facebook (FB) is the second largest holding in the fund and with the companies ‘data’ scandals in its recent past, some would say the fund has too many holdings which don’t fully represent ‘true’ ESG principles. And because the fund is market-cap weighted, its top ten holdings represent 27% of the fund. So, with all that being said, DSI is an ESG fund, but not for the die-hards. So, if you on the fence about ESG investing, this is a good option to consider.
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One extremely broad ESG fund is the Vanguard ESG U.S. Stock ETF (NYSEARCA:ESGV). It currently has 1,439 holdings, an expense ratio of 0.12%, and $402 million in assets under management. It was started in September of 2018 and invests in large, mid and small cap stocks while excluding companies that operate in the ‘Vice’ business such as adult entertainment, alcohol, gambling, tobacco, weapons, as well as fossil fuels and nuclear power and those that meet the UN Global Compact principles guidelines.
Another very broad ESG fund is the Vanguard ESG International Stock ETF (NYSEARCA:VSGX) which has 1,839 holdings. This fund is an ex-US equity fund which includes large, mid, and small cap stocks. The fund excludes all the same companies as its US counterpart, the ESGV fund and also follows the UN Global Compact principles to exclude companies that don’t meet standards for labor rights, human rights, the environment, and anti-corruption. VSGX has an expense ratio of just 0.15%, has only been in existence since September of 2018, and currently has just under $250 million in assets.
One ETF for someone looking for a fund that follows stricter ESG principles is the Global X Conscious Companies ETF (NYSEARCA:KRMA), side note; I absolutely love the ticker. KRMA follows an equal-weighted index that focuses on ESG factors which relate to the five stakeholders of a company; customers, employees, suppliers, stock and debt holders, and communities in which the companies operate. The fund has 159 holdings, and the top ten only represents 7% of assets. Apple (AAPL) and Facebook are both in the top five, but overall, the fund is very diverse. It was started in 2016, has an expense ratio of 0.43%, just $62 million in assets under management, but is up 18.47% year-to-date and up more than 13% over the last year.
Lastly, we have the SPDR SSGA Gender Diversity Index ETF (NYSEARCA:SHE), by the way, another great ticker. SHE is an ESG fund that really doesn’t fall under the basic ESG guiltiness of focusing on companies with high environmental, social, and governance policies. However, SHE invests in US-based large-cap companies that have a high ratio of women on the board of directors and in executive positions defined as Sr. VP or higher. Companies that fall within the top 10% in each sector of the 1,000 largest US companies are then included in the portfolio. SHE currently has 163 holdings, has an expense ratio of 0.20%, $271 million in assets under management and has been in existence since March of 2016. The fund is market-cap weighted, and the top ten holdings represent 44% of assets, with the top holding, Johnson & Johnson (JNJ) making up more than 9% of the fund.
While ESG investing may not be for all investors, it is certainly a style of investing which is increasing in popularity and is unlikely to go away anytime soon as more investors put focus and pressure on large companies to be socially responsible, following several recent high-profile issues with large corporations not protecting their stakeholders. So, if you are still on the fence about these funds, throw one or two on your watchlist and start tracking their movement over the next few months and see if their returns can help move yours in either direction.