iShares ESG Aware MSCI USA ETF (ESGU)
Vanguard ESG U.S. Stock ETF (ESGV)
Xtrackers MSCI USA ESG Leaders Equity ETF (USSG)
iShares ESG MSCI USA Leaders ETF (SUSL)
iShares MSCI USA ESG Select ETF (SUSA)
iShares MSCI KLD 400 Social ETF (DSI)
Nuveen ESG Large-Cap Value ETF (NULV)
Nuveen ESG Small-Cap ETF (NUSC)
iShares ESG Aware MSCI USA Small-Cap ETF (ESML)
Nuveen ESG Large-Cap Growth ETF (NULG)
Xtrackers S&P 500 ESG ETF (SNPE)
IQ Candriam ESG US Equity ETF (IQSU)
Nuveen ESG Mid-Cap Growth ETF (NUMG)
Nuveen ESG Mid-Cap Value ETF (NUMV)
FlexShares STOXX US ESG Impact Index Fund (ESG)
SPDR S&P 500 ESG ETF (EFIV)
iShares ESG Advanced MSCI USA ETF (USXF)
ClearBridge Large Cap Growth ESG ETF (LRGE)
Nuveen ESG Large-Cap ETF (NULC)
WisdomTree U.S. ESG Fund (RESP)
Nuveen Winslow Large-Cap Growth ESG ETF (NWLG)
Hartford Schroders ESG US Equity ETF (HEET)
Fossil Free Funds (6 tied to broad benchmarks)
SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX)
SPDR MSCI EAFE Fossil Fuel Free ETF (EFAX)
SPDR MSCI Emerging Markets Fossil Fuel Free ETF (EEMX)
Etho Climate Leadership U.S. ETF (ETHO)
Change Finance U.S. Large Cap Fossil Fuel Free ETF (CHGX)
iShares iBoxx USD High Yield ex Oil & Gas Corporate Bond ETF (HYXF)
As Todd Rosenbluth of CFRA wrote for an article printed in Barron’s this January, 7 of 10 funds fitting the large-cap or total market categories outperformed the S&P 500 in 2021. My research using ValuEngine data shows that most of these also outperformed the S&P 500 over the five-year period ending December 31, 2021. This is noteworthy since the majority of ETFs and a larger majority of mutual funds did not do so. As many others have documented, we now have enough data to conclude that empirically, the outdated belief that funds that take social responsibility criteria into account must sacrifice performance is dead.
Most institutional portfolio management teams now consider ESG pillar data to be risk factors. From a valuation perspective, they are calculable “intangibles” that should be accounted for on a modernized balance sheet. We are quickly getting to a time where asset managers not doing so risk being criticized for not following best practices. Therefore, ESG ETFs are simply more prudent core investment allocations than traditional ETFs. The Fossil Free funds, on the other hand, necessitate industry sector “bets” and will therefore experience cyclical outperformance and underperformance.
Broad-based ESG ETFs are not, however, the most targeted options for investors that truly wish to align their investment dollars with their personal convictions. ESGU, for example, will contain high-carbon companies such as Exxon Mobil and other companies with business practices many investors may find abhorrent for diverse reasons. Most institutional investors are benchmarked quarterly against an index. Their investment boards may find problematic large quarterly or annual deviations from the benchmark but will accept an index fund that mitigates some ESG risk while posting similar and hopefully slightly superior rates of return. Therefore, ESGU is superior in ESG risk-mitigation to SPY, the oldest S&P 500 Index ETF. An individual or group looking for value alignment however is unlikely to be satisfied because they still own too many companies engaged in activities they consider abhorrent. Investors looking to focus only on the companies most aligned with their values will be even more disappointed by these broad-based ETFs, most of which are more similar to their benchmark indexes than different. I consider the entire trade-off between aligned values and prudent investing to be a very delicate balancing act and investors should be aware of the potential trade-offs.
This week, we focus on ETFs designed to align with one or more particular sets of convictions about the corporation they want to own and/or influence. I refer to this as voting one’s investment dollars in line with long-term person convictions for a better world. Some of these ETFs could replace all or a portion of current core ETF allocations. The remainder are more suitable for smaller “satellite” allocations.
Let’s take a look at seven categories of impact ETFs.
1. Engagement ESG ETFs (2)
Engine No. 1 Transform 500 ETF (VOTE)
Engine No. 1 Transform Climate ETFs (NETZ)
Engagement ESG ETFs are a new category established by a hedge fund company named Engine No. 1. They recently had well publicized success in having Exxon Mobil’s board resolve to focus more on sustainable energy practices while decreasing resources spent on carbon-based fuels. Engine No. 1 decided to parlay this success into a family of ETFs. VOTE launched last year. It holds a broad-based large cap portfolio of stocks, then focuses on aligning corporate practices with sustainable development goals (SDGs) through corporate engagement and shareholder activism. NETZ, presumably with an ultimate goal of net-zero carbon emissions. launched just a few weeks ago with a similar albeit narrower mandate: hold all the major US energy stocks including the polluters, then engage them to try to make them cleaner and more proactive.
These two ETFs are for those who want to attempt to make lasting changes in companies not following beat practices. This approach, by itself, may not satisfy investors not wanting to own companies whose practices do not align with their values. However, I think this is a potential industry game changer. Engine No. 1 made a very impressive presentation in which they outline their engagement and resolutions strategies. They are downloadable from the company’s website.
2. Actively Managed (8)
TrueShares ESG Active Opportunities ETF (ECOZ)
American Century Sustainable Equity ETF (ESGA)
BlackRock U.S. Carbon Transition Readiness ETF (LCTU)
Stance Equity Large Cap Core ETF (STNC)
Fidelity Sustainability U.S. Equity ETF (FSST)
Goldman Sachs Future Planet Equity ETF (GSFP)
Trend Aggregation ESG ETF (TEGS)
VictoryShares THB Mid Cap ESG ETF (MDCP)
3. Low-Carbon and Climate Transition (6)
iShares MSCI ACWI Low Carbon Target ETF (CRBN)
Invesco MSCI Sustainable Future ETF (ERTH)
SPDR MSCI ACWI Low Carbon Target ETF (LOWC)
BlackRock World ex U.S. Carbon Transition Readiness ETF (LCTD)
JPMorgan Carbon Transition US Equity ETF (JCTR)
iClima Global Decarbonization Transition Leaders ETF (CLMA)
4. Clean Energy, Smart Grid, and Cleantech (23)
iShares Global Clean Energy ETF (ICLN)
First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN)
Invesco WilderHill Clean Energy ETF (PBW)
ALPS Clean Energy ETF (ACES)
First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund (GRID)
Invesco Solar ETF (TAN)
Global X Solar ETF (RAYS)
Invesco MSCI Sustainable Future ETF (ERTH)
First Trust Global Wind Energy ETF (FAN)
Global X Wind Energy ETF (WNDY)
Invesco Global Clean Energy ETF (PBD)
SPDR Kensho Clean Power ETF (CNRG)
VanEck Vectors Low Carbon Energy ETF (SMOG)
Global X CleanTech ETF (CTEC)
Global X Renewable Energy Producers ETF (RNRG)
Defiance Next Gen H2 ETF (HDRO)
Direxion Hydrogen ETF (HJEN)
Global X Hydrogen ETF (HYDR)
SPDR S&P Kensho Intelligent Structures ETF (SIMS)
Virtus Duff & Phelps Clean Energy ETF (VCLN)
BlackRock Future Climate and Sustainable Economy ETF (BECO)
iClima Distributed Renewable Energy Transition Leaders ETF (SHFT)
VanEck Green Metals ETF (GMET)
5. Water (6)
Invesco Water Resources ETF (PHO)
Invesco Global Water ETF (PIO)
Ecofin Global Water ESG Fund (EBLU)
Invesco S&P Global Water Index ETF (CGW)
First Trust Water ETF (FIW)
Global X Clean Water ETF (AQWA)
There is a tendency to think of ESG investing and climate investing as the same thing. In fact, they are not. There are more UN Sustainable Development Goals that deal with the Social and Governance pillars than the environmental pillar. I’ve recently contributed to pre-published work showing that companies with the highest scores and positive momentum on social change tend to lead their industry peers in positive environmental score improvement. There are 10 ETFs created to address one or more of the social SDGs as follows:
6. Socially Conscious, Gender and Racial Diversity (10)
iShares MSCI Global Impact ETF (SDG)
Global X Conscious Companies ETF (KRMA)
SPDR® SSGA Gender Diversity Index ETF (SHE)
Goldman Sachs JUST U.S. Large Cap Equity ETF (JUST)
US Vegan Climate ETF (VEGN)
Impact Shares NAACP Minority Empowerment ETF (NACP)
Impact Shares YWCA Women’s Empowerment ETF (WOMN)
Fidelity Women’s Leadership ETF (FDWM)
LGBTQ + ESG100 ETF (LGBT)
Humankind US Stock ETF (HKND)
There are even more ETFs, 14, geared to align investment dollars with faith-inspired beliefs:
7. Faith-Based Social Consciousness (14)
Global X S&P 500® Catholic Values ETF (CATH)
Inspire 100 ETF (BIBL)
Inspire Global Hope ETF (BLES)
Wahed FTSE USA Shariah ETF (HLAL)
SP Funds S&P 500 Sharia Industry Exclusions ETF (SPUS)
Inspire International ESG ETF (WWJD)
Inspire Tactical Balanced ESG ETF (RISN)
Inspire Faithward Large Cap Momentum ESG ETF (FEVR)
Inspire Faithward Mid Cap Momentum ESG ETF (GLRY)
Inspire Corporate Bond Impact ETF (IBD)
Inspire Small/Mid Cap Impact ETF (ISMD)
Timothy Plan High Dividend Stock ETF (TPHD)
Columbus Global Belief ETF (KOCG)
American Conservative Values ETF (ACVF)
Climate change is the impact investing area that draws the most interest from US retail investors. There are three active ETFs that fit this category. In a March 2022 ETF.com article, author Jessica Ferringer noted wryly that the FlexShares STOXX US ESG Impact Index Fund with ESG as the ticker symbol itself had an MSCI Sustainability Rating of just 7.6 as compared with 7.8 for SPY, probably not what ESG investors expected. She noted a number of other such index products barely differentiable in sustainability from SPY and mused whether this was an area better served by active management.
In a recent study detailed in a full article I submitted to the ValuEngine blog We selected three actively managed funds that bolster the point, ECOZ, ESGU and LCTU. The other five funds are index-funds that follow specific algorithms to select impact stocks in alignment with UN-defined Sustainable Development Goals (SDGs). These ETFs include fossil-free broad-based ETHO, clean energy technology tech funds QCLN and PBW and clean water fund PHO. All eight of these ETFs are covered in ValuEngine ETF Reports. Here is the link to the analysis contained in that blog: http://blog.valuengine.com/index.php/time-for-impact-investors-and-contrarians-to-unite-behind-clean-energy-etfs/
The article delved into each ETFs methodology and objectives, included here:
ECOZ, TrueShares ESG Active Opportunities ETF is actively managed to invest in US large-cap stocks selected using a two-phase process. In the initial phase, fund advisors use their own analysis of quantitative data focused on carbon emissions combined with third-party scores to evaluate ESG characteristics and relative scoring. In the second phase, additional fundamental analytics are applied to determine each stock’s relative value. Stocks are then ranked by ESG and relative value within their respective industries, with roughly 75-125 being selected for the investment portfolio.
ESGA, American Century Sustainable Equity ETF – This is one of the first ETFs to use the nontransparent, NYSE Proxy Portfolio structure which discloses holdings only on a quarterly basis with a 15-day lag. The fund actively selects US large-caps using its own quantitative model to score stocks based on their value and growth potential with an overlay of ESG metrics, with the end goal of identifying most attractive ESG stocks. Each stock’s final composite score is evaluated on a sector-specific basis, meaning those with the strongest score in their respective sector are considered for the portfolio.
LCTU, BlackRock U.S. Carbon Transition Readiness ETF is an actively-managed portfolio of large- and mid-cap US firms in the Russell 1000 Index that are selected and weighted with a preference for lower carbon emissions. LCTU uses proprietary scoring criteria to assess the readiness of companies for a low-carbon economy transition, relative to their industry peers. The ‘transition readiness’ score includes five segments: Fossil Fuels, Clean Technology, Energy Management, Waste Management and Water Management. LCTU overweights high-scoring firms while mitigating risk. In addition to this strategy, firms may also be evaluated for good governance.
ETHO, ETHO Climate Leadership ETF – tracks the performance of an equal-weighted index that selects US stocks that exhibit the least carbon impact within its industry. Each company is measured according to their climate impact, which is calculated based on total greenhouse gas emissions from operations, fuel use, supply chain, and business activities, divided by market capitalization. The top scoring half in each industry is selected, while simultaneously excluding all companies in energy, tobacco, aerospace and defense, gambling, gold, and silver sub-industries.
QCLN, First Trust NASDAQ Clean Edge Green Energy Index Fund – QCLN holds a broad cap-weighted portfolio of US-listed firms in the clean energy industry. Eligible companies must be manufacturers, developers, distributors, or installers of one of the following four sub-sectors: advanced materials (that enable clean-energy or reduce the need for petroleum products), energy intelligence (smart grid), energy storage and conversion (hybrid batteries), or renewable electricity generation (solar, wind, geothermal, etc). Because there is subjectivity in classifying companies as “clean energy”, potential investors would be well-served by reviewing the fund’s portfolio to make sure your definition of “clean energy” matches QCLN’s.
PBW, Invesco WilderHill Clean Energy ETF – PBW tracks a modified equal-weighted index of companies involved in cleaner energy sources or energy conservation. It is highly diverse in scope, reaching beyond just industry pure-plays like wind, solar, biofuels and geothermal companies, to include companies based on their perceived relevance to the renewable energy space. The fund’s proprietary selection process and its mandate to hold only US-listed companies select companies that are perceived to benefit from the societal transition or advancement toward clean energy and conservation.
PHO, Invesco Water Resources ETF – PHO is a water-themed fund of US companies that create products that conserve and purify water for homes, businesses, and industries. Securities also participate in the Green Economy, as determined by SustainableBusiness.com LLC. Holdings are weighted by liquidity, with no more than five companies capped at 8% and with the rest distributed equally. The index is reconstituted annually in April and rebalanced quarterly
ESG, FlexShares STOXX Select ESG ETF – follows a principles-based index composed of US-listed companies that exhibit environmental, social, and corporate governance (ESG) characteristics. Until recently, the fund was named FlexShares STOXX US ESG Impact Index Fund. STOXX is a Switzerland based index provider that launched as a pioneer in sustainable indexing more than 20 years ago. Selection factors are aligned with UN Sustainable Development Goals (SDGs). They include: low emissions; board governance and inclusion criteria; policies against child labor, and non-use of golden parachute agreements. Disqualifying characteristics include non-adherence to UN Global compact principles, involvement in controversial weapons, or coal mining. All qualifying constituents are weighted based on an aggregated “ESG score” derived from the factors mentioned above.
These were the conclusions and key points from the analysis.
1. Six of the eight ETFs are rated by our ValuEngine models to outperform for the next 6-month and year-ahead periods. We think investments in all six of these ETFs are very timely right now. The funds with our top rating of 5 include: ESGA, PBW, PHO and QCLN.
2. In descending order, the four ETFs top-rated for overall ESG performance by MSCI are: PHO, ECOZ, ESGA and LCTU. In keeping with the earlier ETF.com reporter’s observation, three of the four are actively managed with only the indexed clean water ETF topping the more sector-diversified actively managed funds. Even though all three are listed as ESG funds taking all the SDGs into account, all three also qualify as environmental impact funds.
3. The three actively managed ETFs all have less than three years of actual history and only ECOZ has two years under its belt. Still, the best performer for the last 12-months and 1 month, ESGA, is in the actively managed category with nearly a 10.9% 12-month return while the majority of the others had negative returns. ESG had the least negative return over the past three months and placed second for the past 12 months.
4. For long-term performance, the best ETFs were the clean energy ETFs despite the carnage they endured in the past year. 5-year rates of return for QCLN and PBW respectively were 25.7% and 22% respectively as compared with 13.6% for SPY, the SPDR S&P 500 Index ETF. On the risk side, they have by far the two highest annual price volatility records of this group at greater than 30% per annum.
5. The two INVESCO indexed clean environmental ETFs, PBW and PHO both with top VE ratings, are the two oldest ETFs in the study. This is because they acquired a company called PowerShares that was a true innovator in providing and promoting ETFs fitting this category. Fittingly, PowerShares Founders Bruce Bond and John Southard now head a provider called Innovator ETFs.
6. Surprisingly, the lowest expense ratio in this sample set belongs to an actively managed fund, LCTU by Blackrock at just 0.19%. The BlackRock brand is being used for the company’s’ active ETFs in lieu of the iShares brand for its indexed products. Continuing this aberration, the three most expensive ETFs are all indexed including the two from INVESCO PBW and PHO along with QCLN from First Trust.
7. Only LCTU (2.4%) and PBW (2.2%) provide good dividend yields for investors, about 120 and 100 basis points respectively of SPY. Of the remaining ETFs, only ESG has a dividend yield above 1%. The Price/Book and Price/Earnings ratios available on these ETFs are also not suitable for value investors. The least overvalued by these measures are ETHO and LCTU.
8. Most of these ETFs are relatively small in Assets Under Management (AUM). The exception, surprisingly to me, is also the youngest. BlackRock’s LCTU, the most institutionally priced, has more than $1 billion in AUM. Three others, ETHO, QCLN and ESGA are also over $100 Million in AUM. Despite its long history and the highest rates of return of this group of ETFs, PBW has just under $30 million in AUM. All three of the remaining ETFs are under $15 million in AUM with less than $5 million in ESG. I am not an alarm-bell sounder on low-AUM ETFs. The funds are backed by the underlying securities and even if a sponsor closes a US-stock-based ETF, investors will get out whole. Since these consist primarily with large-to-midcap US stocks, investors should do fine in the event of liquidation. ESG by FlexShares is probably the most immediately vulnerable to possible liquidation.
9. ValuEngine’s models are calling strongly for a rally in these impact ETFs, particularly the three focused most directly on clean energy: QCLN, PBW and PHO. ESGA is the highest rated active fund and also has better last-12-month performance than the other two. Going against the price trend and most pundits believing that clean energy stocks will remain out of favor for the foreseeable future, contrarians may wish to swoop in now. ETHO and ECOZ also should both be attractive now to contrarians.
9. The socially themed ETFs that align with values should also not be dismissed. I recently wrote a blog article for ValuEngine specific to Gender Lens investing. http://blog.valuengine.com/index.php/etfs-for-gender-lens-investing/ It reflects outperformance for the ImpactShares WOMN during the previous five years. The largest ETF by AUM in the category is SHE from SPDRs by SSgA. Until 2021, it had fine performance but has stumbled badly in the past 12 months. Still it is an excellent fund and highly rated for future performance by ValuEngine. Two more recent active entries, FDWM from Fidelity and EQUL from IQ are also discussed. In a future article, I hope to anslyze remaining Diversity Equity and Inclusion (DEI) ETFs LGBT and NACP along with three ETFs including DEI among their commitments to UN sustainable development goals: SDG; JUST and HKND.
10. The fact that there are 14 religious-themed ETFs indicate that there is a significant number of investors interested in aligning their investments with their religious beliefs. InspireShares is the leader here with half of the ETFs in the category. Although some would consider the values in these ETFs directly at odds with the DEI-themed ETFs just discussed a quick analysis of the security names held by such funds reflects more similarities than differences. In principle, both groups are concerned with ethics and proactive management so eliminating companies with poor governance practices and in many cases, poor environmental practices make some of the resulting ETFs more similar than different.
11. The perspectives of investment professionals, portfolio managers and writers such as myself need to be tempered when reviewing impact-themed funds. Including myself in this aggregation of categories, we cannot compare or discuss ETFs without focusing on the most currently available performance data. However, I generally discourage impact investors from quarter-to-quarter or even year-to-year performance comparisons. On an individual basis, most of these investors who have committed to such funds tend to follow this pattern. High conviction investors may occasionally wish to look at the website to make sure that holdings are in alignment with their values but they should not worry too much about short-term investment return fluctuations.
12. Impact investing very much depends on values and perspective. This is where some investors including yours truly may have a problem with semi-transparent ESGA. It uses a proxy holdings file containing decoy securities to protect its positions. That may help the American Century team by being front-run in trades but provides less comfort on the values-in-alignment investor. Personally, for this reason, I hold a position in one of my portfolios in ECOZ from TrueShares which is a fully disclosed active ETF with a Chief Investment Officer, Linda Zhang, that I happen to know well personally and have a lot of faith in.
13. In the same account I recently added a position in STNC by Stance Capital despite its very short history. STNC represents perhaps the best compromise to full position disclosure and opaque trading basket protection to shield ETFs from potentially large impact trading costs. It uses Shielded Alpha fintech from Blue Tractor Group. The result is that I know 100% of the stocks owned by STNC but competitive traders cannot see the amounts of those shares, if any, that may being sold (or bought) that day. STNC Founder Bill Davis is also someone I’ve followed for years and is also well respected in the “ESG Circuit.” Also, he uses the Shielded Alpha technology from Blue Tractor Group. For ESG active management, this makes so much sense since ESG investors need to know which securities a fund is holding but do not want the fund to incur potential added impact costs in its basket trades from front-running traders. It is a trade-off that must be considered. Ideally, full transparency goes best with the foundations of ESG. The question is whether the fund manager should embrace the ideal to the letter rather than protecting the fund from losing money on trades due to market impact with available technology. Everyone should do their own research and exercise their own judgments.
In summary, different impact investors view values-alignment and positive change in different ways. However, for true impact, investing in aligned companies and shunning non-aligned companies may not be enough to stimulate capital reallocation to “good” companies in the long run.
Looking at the long view to instigate lasting change, the greatest potential impact ETFs and their investors can make lies in taking the lessons of VOTE to the next level. I think Engine No. 1 is right on the mark with a huge problem for sustainability advocates. Here is the bigger problem. Most of the very same large asset management companies that offer a variety of ESG-themed mutual funds do not have a proxy-voting policy that aligns those funds with sustainable development goals. In fact, they generally vote their ESG fund proxies the same way they vote their large index and core fund proxies – for management and against shareholder resolutions. In recent years, some have modified these policies to an extent on specific issues. Most have not.
Vanguard, for example, stated recently that they are still studying this issue, taking recommendations “under advisement.” For many investors in ESGV, this is far from a satisfactory response – even though it is the most highly recommended ESG ETF recommended by 24/7 Wall Street with the cited reasons being its category-lowest fees and the second highest assets under management and trading volume. In point of fact, I believe investors committed to impact value change over fees. Vanguard’s proxy voting practices on ESGV should be anathema to ESG investors but the problem goes much further. Any institution that offers an ESG fund at all should not only vote that fund’s proxies for engagement and proactive reform, but they should also vote all proxies in alignment with best industry practices, not as a rubber stamp for management to kill minority proposals. Otherwise, aren’t they being somewhat hypocritical in offering ESG funds while abetting companies that continue to flout laws and refuse to disclose practices by voting proxies in favor of management?
This is quickly becoming my latest “soapbox.” I urge all ETF and mutual fund shareholders start to go beyond investing to be change agents and hold all ESG and impact mutual funds and ETFs to higher standards. The first step to take would be to obtain f the firm’s proxy voting policy statement from investor relations. It should be a matter of public recors. If it does not have a policy geared to vote proactively to get companies more aligned with best practices and SDGs, then perhaps more concerted efforts should be considered to support shareholder resolutions on proxy policy reform. The key to corporate change is corporate engagement.