Environmental, social, and governance (ESG) exchange traded funds are ETFs that focus on investing in businesses that follow good ESG practices. This includes things like taking steps to reduce their impacts on the environment, ensuring that they treat all of their employees and vendors fairly, and encouraging fair and equitable corporate governance.
ESG investing has grown more popular in recent years as the impacts of climate change and social injustice have become clearer to investors and business leaders alike. The number of institutional investors choosing to add ESG-focused investments to their portfolios increased by 18% between 2019 to 2021. Many agree that ESG investing also has the potential to increase returns.
ESG ETFs give everyday investors an easy way to add ESG investments to their portfolios. To build this list, which mentions funds in no particular order, we examined a few dozen funds and looked at factors such as:
- Expense ratio
- Assets under management (AUM)
- Historical returns
- What aspects of ESG investing the ETF focuses on
|ETF Name||AUM (as of Nov. 5, 2021)||Expense Ratio||Inception Date|
|Vanguard ESG U.S. Stock ETF||$5.2 billion||0.12%||Sept. 18, 2018|
|iShares MSCI Global Impact ETF||$564 million||0.49%||April 20, 2016|
|SPDR S&P 500 Fossil Fuel Reserves Free ETF||$1.2 billion||0.20%||Nov. 30, 2015|
|iShares ESG Aware USD Corporate Bond ETF||$869.4 million||0.18%||July 11, 2017|
|Xtrackers MSCI USA ESG Leaders Equity ETF||$4.125 billion||0.10%||March 7, 2019|
The Vanguard ESG U.S. Stock ETF (ESVG)
- Return since inception (as of Nov. 5, 2021): 20.3%
- Expense ratio: 0.12%
- Assets under management (AUM): $5.2 billion (as of Nov. 5, 2021)
- Inception date: Sept. 18, 2018
The Vanguard ESG U.S. Stock ETF is offered by Vanguard, a company well known for its low-cost investment options. This ETF follows that pattern, charging an expense ratio of just 0.12%, equivalent to $1.20 on a $1,000 investment.
While the fund is relatively young, Vanguard’s brand recognition has helped it grow quickly. It now has $5.2 billion in assets, meaning investors needn’t worry about liquidity. As of Nov. 5, 2021, the fund had a one-year return of 43.29% and offered 20.3% returns since its inception in September 2018. These returns are in line with the benchmark Vanguard has chosen for the fund, which is the FTSE US All Cap Choice Index.
The fund gets its ESG focus in the companies that Vanguard excludes from the fund compared to its chosen index. The fund does not own shares in any businesses that:
- Produce alcohol, tobacco, gambling, and adult entertainment
- Produce civilian, controversial, and conventional weapons
- Produce nuclear power
- Do not meet certain diversity criteria
- Have violations of labor rights, human rights, anti-corruption, and environmental standards defined by UN Global Compact Principles
- Own proved or probable reserves in fossil fuels such as coal, oil, or gas
According to a Morningstar analyst report, the fund’s low expense ratio gives it an edge over the competition, letting it overperform the competition by 5.54 percentage points on an annual basis.
The iShares MSCI Global Impact ETF (SDG)
- 3-year return (as of Nov. 5, 2021): 19.67%
- Expense ratio: 0.49%
- Assets under management (AUM): $564 million (as of Nov. 5, 2021)
- Inception date: April 20, 2016
The iShares MSCI Global Impact ETF focuses on companies that advance the United Nations’ Sustainable Development Goals, which include a focus on improving education and fighting climate change throughout the world.
The fund charges an expense ratio of 0.49%, equivalent to $4.90 per $1,000 invested. It has, as of Nov. 5, 2021, returned 20.66% over the past year and 19.67% over the past three years. These returns are in line with the returns of the fund’s benchmark, the MSCI ACWI Sustainable Impact Index.
Roughly a quarter of the fund’s holdings are based in the United States, with the remainder coming from other top economies around the world. This means the fund gives investors good exposure to international businesses.
The SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX)
- 3-year return (as of Nov. 5, 2021): 21.87%
- Expense ratio: 0.20%
- Assets under management (AUM): $1.2 billion (as of Nov. 5, 2021)
- Inception date: Nov. 30, 2015
The SPDR S&P 500 Fossil Fuel Reserves Free ETF is an index fund that aims to track the S&P 500 without owning any companies that are involved in fossil fuels. For the purposes of this fund, this refers to any companies that own reserves of fossil fuels such as coal, oil, or natural gas.
The S&P 500 is an index that includes some of the largest businesses in the United States and is often used as a benchmark for the American economy as a whole. That makes this fund a good way to get broad exposure to the U.S. market without investing in some of the companies directly responsible for climate change.
The fund tracks its index quite closely, lagging it by about 0.20% (equal to its expense ratio) over most periods. The fund’s 0.20% expense ratio means investors pay the equivalent of $2 for every $1,000 they have invested.
The iShares ESG Aware USD Corporate Bond ETF (SUSC)
- 3-year return (as of May 31, 2021): 7.36%
- Expense ratio: 0.18%
- Assets under management (AUM): $869.4 million (as of Nov, 5, 2021)
- Inception date: July 11, 2017
Not every ESG-focused ETF owns shares in the companies. Fixed-income investors can get exposure to ESG businesses with bond funds that buy corporate bonds from companies that follow ESG principles.
The iShares screens companies for involvement in the industries of weapons, tobacco, and fossil fuels before purchasing their investment-grade bonds. It then designs its portfolio to try to achieve risk and returns similar to the broader Bloomberg U.S. Corporate Index.
The fund’s expense ratio is reasonable, at 0.18%, equivalent to a fee of $1.80 for every $1,000 invested. However, its returns lag behind its benchmark’s return by a margin somewhat larger than its expense ratio.
An ETF.com analysis called the fund a “building block for investors looking to structure their own ESG focused portfolio.” It provides exposure to bonds from across the globe, though all the bonds must be U.S. dollar-denominated.
The Xtrackers MSCI USA ESG Leaders Equity ETF (USSG)
- Return since inception (as of Nov. 5, 2021): 17.55%
- Expense ratio: 0.10%
- Assets under management (AUM): $4.125 billion (as of Nov. 5, 2021)
- Inception date: March 7, 2019
Offered by European asset manager DWS, the Xtrackers MSCI USA ESG Leaders Equity ETF aims to track the MSCI USA ESG Leaders Index. This index focuses on companies with strong ESG scores compared to their peers in the same sector. It aims to give investors exposure to a diverse set of companies while also letting them focus on businesses with the best ESG practices in their industries.
The fund has tracked its index very closely, with returns differing by less than 0.10% over the course of the fund’s existence.
With an expense ratio of 0.10%, equivalent to $1 for every $1,000 invested, this ETF is one of the cheapest ESG ETFs available. It has also built up a large number of assets despite being just over two years old.
According to an analysis from Morningstar, the MSCI USA ESG Leaders index holds stocks representing the top half of each sector’s total market capitalization that are eligible based on its ESG scoring. The Xtrackers ETF has a ”well-diversified portfolio” that is similar to its benchmark index, but it is notably missing large-cap stocks with low ESG ratings such as Meta (formerly Facebook), Apple, or Amazon. It does however invest in Google’s parent company, Alphabet.
Pros and Cons of Investing in ESG ETFs
- Feel good about what you invest in
- ESG may offer better performance, lower risk
- Miss out on exposure to some companies and industries
- Fewer options
- Feel good about what you invest in: Some people feel strongly about supporting companies with good practices and avoiding those that damage the environment or treat workers poorly. ESG investments give those investors the chance to put their money where their mouth is.
- ESG may outperform: Research from Morningstar shows that in 2020, sustainable funds and ETFs outperform traditional funds. According to Morgan Stanley, between 2004 and 2018, ESG funds delivered returns that were in line with traditional funds but offered less downside risk and more stability during times of market volatility.
- Miss out on exposure to some companies/industries: Most ESG funds exclude businesses in industries such as weapons production, tobacco, or alcohol. These industries make up a significant portion of the economy, and excluding them means less diversification for your portfolio.
- Fewer options: ESG investing is still relatively young, and while many major financial companies have started offering products focusing on ESG, there are fewer investment options for people who want to add ESG funds to their portfolios. For example, Vanguard offers just 3 ESG ETFs and 73 ETFs without a focus on ESG.
Historical Performance Trends
There are many factors that could influence the performance of ESG-focused investments. Many ESG principles relate to environmental sustainability and social justice, both of which have increased in awareness in recent years.
In recent years, ESG investments have succeeded, with many businesses committed to ESG principles outperforming the market during the coronavirus pandemic. If this trend continues, then ESG investing could become a more important topic going forward.
Is an ESG ETF Right for Me?
Investors considering adding an ESG ETF to their portfolio should consider the reasons they’re thinking about ESG investing.
If your goal with ESG investing is a moral one, only you can answer whether you think supporting companies with an ESG focus is worth adjusting your investment strategy.
If your goal is to improve your returns, you’ll need to take a broader look at the funds available and analyze whether you think ESG investing will truly improve your performance.
While some analysts argue that ESG investing is beneficial, take a look at the ETF’s holdings to see if they truly follow ESG principles.
The Bottom Line
ESG ETFs are funds that focus on companies taking steps to behave ethically and sustainably. If consumers continue to trend toward rewarding these companies over those that may not treat workers or suppliers as well, ESG investing could be a boon for your portfolio. However, if trends or consumer preferences change to be less socially conscious, you may miss out on gains from other types of companies.
Frequently Asked Questions (FAQs)
How Do ESG ETFs Work?
ESG ETFs are exchange-traded funds that focus on companies that are socially responsible or that work to reduce their impact on the environment. They typically aim to track a market index and exclude businesses in industries like weapons or fossil fuels.
How Can I Invest in ESG ETFs?
The best way to invest in an ESG ETF is through a brokerage account. Many companies, like Vanguard, offer brokerage accounts and ESG ETFs, making it easy for you to get started.
Another option is to use an investing app to buy shares in one of the many ESG ETFs on the market.
When Should I Buy ESG ETFs?
When to buy an investment is a personal decision that you should make after considering your investment goals and timeline. Many ESG funds hold stocks, which can be volatile, but options such as ESG bond funds can reduce volatility and short-term risk.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.
Natixis Investment Managers. "2021 ESG Investor Insights Report- Everyone’s on the ESG Investing Bandwagon," Page 7.
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Morningstar. "Vanguard ESG US Stock ETF ESGV."
iShares by BlackRock. "iShares MSCI Global Impact ETF."
State Street Global Advisors SPDR. "SPDR S&P 500 Fossil Fuel Reserves Free ETF SPYX."
iShares by BlackRock. "iShares ESG Aware USD Corporate Bond ETF."
ETF.com. "SUSCiShares ESG Aware USD Corporate Bond ETF."
Marketwatch. "Xtrackers MSCI USA ESG Leaders Equity ETF."
Morgan Stanley Institute for Sustainable Investing. "Sustainable Reality - Analyzing Risks and Returns of Sustainable Funds," Page 1.
Morningstar. "Sustainable Equity Funds Outperform Traditional Peers in 2020."