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: 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 entertainmentProduce civilian, controversial, and conventional weaponsProduce nuclear powerDo not meet certain diversity criteriaHave violations of labor rights, human rights, anti-corruption, and environmental standards defined by UN Global Compact PrinciplesOwn 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 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 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 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 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. 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.
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.
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.
