CATH

ETFs Are Making It Easy To Be A Socially Responsible Investor

Socially responsible investing used to be very low on the priority list for most fund providers. Some may even relegate it to a niche trend with small market potential when compared to the overwhelming demand for income or smart-beta indexes. However, the rise of gender equality, environmental impact, and other social issues has created a booming new category within the ETF universe.

This year alone, there have been 12 new ETFs released that focus on “Environmental, Social, or Governmental” issues, otherwise known as ESG. These new funds are aimed at greater control over company, sector, geographical, and factor exposure in a low-cost and diversified investment vehicle.

New 2016 ESG Fund Launches

Investors want the ability to put their money towards corporations that share their values. Or, at the very least, avoid some industries with questionable track records of corporate governance or that rely heavily on harvesting natural resources. ETFs make for a very easy way to access this movement and are continuing to refine their methods to create even greater control for their shareholders.

The iShares MSCI USA ESG Select ETF (KLD) is part of the first generation of ESG investing and has been in existence since 2005. This ETF has $420 million dedicated to a small group of 115 large and mid-cap stocks in the U.S. screened for social values. The fund is heavily weighted towards the technology sector, with top holdings in well-known companies such as Apple Inc (AAPL) and Microsoft Corp (MSFT).

While this ETF has become somewhat of a benchmark in the ESG world, its 0.50% management fee makes it more expensive than index-based investors have come to expect. It also has a smaller number of holdings when compared to more diversified “total market”-style funds. That may create issues for investors that are looking to build around a truly expansive core holding.

Fortunately, the more recent wave of ESG funds have set out to solve those issues in several unique ways.

The SPDR MSCI ACWI Low Carbon Target ETF (LOWC) is one example of this second generation. The index LOWC is based on was constructed to minimize exposure to companies with high carbon emissions and fossil fuel reserves. The result is a global portfolio of over 1,400 stocks that charges a net expense ratio of just 0.20%. LOWC debuted nearly 2 years ago and has accumulated $95 million in total assets.

Another popular method for ESG investing has been to start with a well-known index such as the S&P 500 and then subtract companies based on specific criteria. For instance, the SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX) has essentially eliminated energy exposure in its portfolio. The SPYX basket still contains 477 stocks from the original S&P 500.

The Global X S&P 500 Catholic Values (CATH) takes a similar approach by eliminating 35 S&P companies that don’t live up to the values of the Catholic church. This fund screens out companies that sell weapons or employ child labor in their supply chains.

There is also an easy-to-use investment vehicle that tackles gender diversity issues. The SPDR SSGA Gender Diversity Index ETF (SHE) provides exposure to U.S. large cap companies that emphasize gender diversity in senior leadership roles. It currently owns a diverse mix of 182 stocks and charges an expense ratio of 0.20%. This ETF launched in the early part of 2016 and has already managed to accumulate over $270 million in assets.

The new crop of funds for 2016 are also beginning to expand overseas as well. Several global and dedicated international positions allow for greater expansion of this theme worldwide. That should sit well with investors who look to pair both U.S. and international stocks for enhanced diversification.

The Bottom Line

The lineup of funds in the ESG category continues to improve with cheaper and more flexible investment offerings. This is obviously an area that fund companies are looking to introduce to a broader audience with multi-factor screening criteria and innovative indexes. Furthermore, the enhanced menu allows investors to choose their exposure to certain companies or sectors with greater control than ever.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Info icon

This data feed is not available at this time.

Sign up for the TradeTalks newsletter to receive your weekly dose of trading news, trends and education. Delivered Wednesdays.