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Guide to Socially Responsible ETFs

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Gone are the days when ETF issuers and investors used to consider market-cap oriented, dividend-paying or style-based products. The industry has been expanding fast lately, resorting to a smarter approach and widening into new markets and niches. Amid the whole bunch of newer themes, socially relevant funds or environmental, social and governance (“ESG”) investing are in vogue lately.

The investing trend has remained a hot favorite among investors since the pre-outbreak period. Wall Street had recorded the worst quarter to start 2020 since the fourth quarter of 2008. But ESG ETFs had appeared somewhat resilient to acute selloffs in the first quarter of 2020 (read: Here's Why ESG ETFs Are Hot Amid Pandemic).

Between 2018 and 2020, total U.S.-domiciled sustainably invested assets under management, both institutional and retail, skyrocketed 42% to $17.1 trillion, per a CNBC article. Notably, BlackRock launched 93 new sustainable solutions in 2020, helping clients allot $39 billion to sustainable investment strategies, which drove a 41% increase in sustainable AUM from Dec 31, 2019.

Investors intend to double their allocations to sustainable products over the next five years, per BlackRock and 20% said that the pandemic has actually brought their sustainable investing allocations on the fast-track mode.

Sustainable investing has outdone the S&P 500 in recent times with iShares MSCI KLD 400 Social ETF (DSI - Free Report) gaining 43.4% in the past two years, 60.9% in the past one year and 4.3% so far this year compared with 39.6% two-year, 59.8% one-year and 4.1% year-to-date gains in the S&P 500. Over the past five years too, DSI is up 79.5% versus 73.1% gains in the S&P 500 (as of Mar 24, 2021).

Inside the Outperformance Amid Covid-19

Hortense Bioy, Morningstar’s director of passive strategies and sustainability research for Europe, indicated that “companies with higher ESG scores tend to be of higher quality, experience lower volatility and be relatively large. This bodes well for the potential of ESG strategies in a downturn,” as quoted on moneyobserver.com.

The Bloomberg Law analysts are of the opinion that though risk considerations of a pandemic are not exactly the same as conventional ESG analyses, they are equivalent. The latest trend of working from home policies — leaves an impact on that company’s ESG performance in the ‘Social’ context. Other factors like “workplace safety, data privacy, job security, and community impact” are also making ESG investing more meaningful amid the pandemic, notified Bloomberg.

Why is it a Consistently Surging Segment?

Investors appear to be bothered about the future of the environment and the effect it might have on their investing portfolio. For example, since apprehension about the death of natural resources has urged global superpowers to boost clean energy and reduce carbon emissions, investors believe that stocks with higher ESG scores will eventually outperform.

Apart from the social standpoint, this investing practice has a valid reason for increased gains. As per the source, lesser focus on environmental issues by the companies may result in lawsuits, fines and damages. In most cases, it has been seen that sound corporate governance leads to greater corporate durability.

U.S. President Joe Biden is also known as promoting clean energy. The United States once again entered the Paris climate accord – adopted in 2016 – in the Biden era (read: Will ESG ETFs Flourish Under a Biden Presidency? Let's Explore).

Most ESG ETFs Are Tech-Heavy

The need and durability of technology is here to stay with or without the virus crisis. Since most ESG ETFs are tech-heavy, the bright future of the socially responsible funds is self-explanatory (read: Inside Tech ETFs' Decline: Is a Rebound in the Cards?).

ETFs in Focus

iShares ESG MSCI U.S.A. ETF (ESGU - Free Report) — AUM $15.07 billion

The underlying MSCI USA Extended ESG Focus Index comprises U.S. companies that have positive ESG characteristics while exhibiting risk and return characteristics similar to those of the parent index. The fund charges 15 bps in fees.

iShares ESG MSCI EAFE ETF (ESGD - Free Report) — AUM $4.97 billion

The underlying MSCI EAFE Extended ESG Focus Index comprises large and mid-capitalization developed market equities, excluding the U.S. and Canada that have positive ESG characteristics. The fund charges 20 bps in fees.

iShares ESG MSCI USA Leaders ETF (SUSL - Free Report) — AUM $3.11 billion

The underlying MSCI USA Extended ESG Leaders Index comprises U.S. large and mid-capitalization stocks of companies with high ESG performance relative to their sector peers. It charges 10 bps in fees.

Xtrackers MSCI U.S.A. ESG Leaders Equity ETF (USSG - Free Report) — AUM $3.28 billion

The underlying MSCI USA ESG Leaders Index is a capitalization weighted index that provides exposure to companies with high ESG performance relative to their sector peers. The fund charges 10 bps in fees.

iShares MSCI KLD 400 Social ETF (DSI - Free Report) — AUM $2.87 billion

The underlying MSCI KLD 400 Social Index is a free float-adjusted market capitalization index designed to measure the equity performance of U.S. companies that have positive ESG characteristics. The fund charges 25 bps in fees.

iShares MSCI USA ESG Select ETF (SUSA - Free Report) — AUM $2.84 billion

The underlying MSCI USA Extended ESG Select Index comprises U.S. companies that have positive ESG characteristics. The fund charges 25 bps in fees.

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