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Socially Responsible ETFs: Key Differences Between the Funds?
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Socially responsible investing has been gaining immense popularity and is now the fastest growing niche space. This is because the strategy aims to incorporate environmental, social and governance (ESG) factors like environment friendly policies, consumer protection, human rights, and diversity, into investment decisions and results in a well-managed risk portfolio with sustainable long-term returns.
In other words, socially responsible investing seeks to avoid damage or mischief by screening companies on ESG fronts. It excludes companies with a negative social or environmental impact, such as weapons, alcohol, tobacco, and gambling. Additionally, companies having a good track of ESG generally outperform in the long term (read: Guide to Socially Responsible ETFs).
However, the strategy has several drawbacks. First, defining ESG companies is ambiguous and subjective. Second, the ETFs charge higher fees compared to the plain-vanilla products. This could end up in lower returns. Further, these ETFs are less diversified as these have a smaller number of companies in their roster, making them susceptible to the specific industry or country risks.
Despite these problems, the ETFs have been on a rising trend with the launch of 22 products in 2016 and a huge number of filings made. As such, the space has become crowded with 34 ETFs as per xtf.com, which accounts for $3.64 billion of assets under management.
Below, we have highlighted some of the most popular funds that could make for an exciting choice in this hottest corner of the ETF market. All these have different themes to socially responsible investing and in that specific corner, differ in one way or the other.
ESG Themed ETFs
iShares MSCI KLD 400 Social ETF (DSI - Free Report) vs. iShares MSCI USA ESG Select ETF
Both funds provide exposure to U.S. stocks that have screened for positive environmental, social, and governance characteristics and charge 50 bps in annual fees. Information technology is the top sector in the portfolio of both funds.
DSI tracks the MSCI KLD 400 Social Index and is home to a large basket of 399 stocks while KLD follows the MSCI USA ESG Select Index, holding 120 stocks. The former has amassed $807.1 million in its asset base and trades in average daily volume of 43,000 shares. On the other hand, KLD has AUM of $525.2 million and average daily volume of about 22,000 shares.
Both ETFs provide investors global exposure to companies that are less dependent on fossil fuels by tracking the MSCI ACWI Low Carbon Target Index and charge 0.20% in expense ratio. While financials is the top sector and American firms dominate half of the portfolio of both the funds, CRBN is more popular and liquid with AUM of $367.8 million and average daily volume of 13,000 shares. In contrast, LOWC has amassed $135.5 million in its asset base while trades in a paltry volume of around 1,000 shares. However, CRBN is less diversified with 1,192 securities compared with 1,572 for LOWC (read: Sustainable Investing: What Is It and Why Is It Hot Now?).
Women-Based ETFs
SPDR SSGA Gender Diversity Index ETF (SHE - Free Report) vs. Barclays Women in Leadership ETN
Though both funds target companies that exhibit gender diversity in their senior leadership position, they have a different approach. SHE tracks the SSGA Gender Diversity Index and holds 186 stocks in its basket. It has accumulated $294.3 million in its asset base since its debut a year ago and trades in meager volume of under 3,000 shares (read: 6 Successful ETF Launches of 2016).
On the other hand, WIL is an ETN option that follows the Women in Leadership Index, which provides exposure to U.S. companies that have either female CEOs or at least 25% female members on their board of directors. It has been often overlooked by investors as depicted by its AUM of just $33.4 million and average daily volume of about 300 shares. Additionally, the note charges higher fee of 45 bps compared to 0.20% for SHE.
While the duo offers exposure to the U.S. "fossil fuel free" companies, they have varied methodology. SPYX follows the S&P 500 Fossil Fuel Free Index and holds 473 stocks in its portfolio. It has been able to gather $136.6 million in its asset and charges 20 bps in fees per year from investors. Volume is light and exchanges 7,000 shares in hand a day on average. On the other hand, ETHO tracks the Etho Climate Leadership Index, holding 371 securities. The product has amassed $13.2 million in its asset base while trades in average daily volume of more than 3,000 shares. It charges 49 bps in annual fees from investors (read: ETFs for a Green Portfolio on Earth Day).
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Socially Responsible ETFs: Key Differences Between the Funds?
Socially responsible investing has been gaining immense popularity and is now the fastest growing niche space. This is because the strategy aims to incorporate environmental, social and governance (ESG) factors like environment friendly policies, consumer protection, human rights, and diversity, into investment decisions and results in a well-managed risk portfolio with sustainable long-term returns.
In other words, socially responsible investing seeks to avoid damage or mischief by screening companies on ESG fronts. It excludes companies with a negative social or environmental impact, such as weapons, alcohol, tobacco, and gambling. Additionally, companies having a good track of ESG generally outperform in the long term (read: Guide to Socially Responsible ETFs).
However, the strategy has several drawbacks. First, defining ESG companies is ambiguous and subjective. Second, the ETFs charge higher fees compared to the plain-vanilla products. This could end up in lower returns. Further, these ETFs are less diversified as these have a smaller number of companies in their roster, making them susceptible to the specific industry or country risks.
Despite these problems, the ETFs have been on a rising trend with the launch of 22 products in 2016 and a huge number of filings made. As such, the space has become crowded with 34 ETFs as per xtf.com, which accounts for $3.64 billion of assets under management.
Below, we have highlighted some of the most popular funds that could make for an exciting choice in this hottest corner of the ETF market. All these have different themes to socially responsible investing and in that specific corner, differ in one way or the other.
ESG Themed ETFs
iShares MSCI KLD 400 Social ETF (DSI - Free Report) vs. iShares MSCI USA ESG Select ETF
Both funds provide exposure to U.S. stocks that have screened for positive environmental, social, and governance characteristics and charge 50 bps in annual fees. Information technology is the top sector in the portfolio of both funds.
DSI tracks the MSCI KLD 400 Social Index and is home to a large basket of 399 stocks while KLD follows the MSCI USA ESG Select Index, holding 120 stocks. The former has amassed $807.1 million in its asset base and trades in average daily volume of 43,000 shares. On the other hand, KLD has AUM of $525.2 million and average daily volume of about 22,000 shares.
Low Carbon ETFs
iShares MSCI ACWI Low Carbon Target ETF (CRBN - Free Report) vs. SPDR MSCI ACWI Low Carbon Target ETF
Both ETFs provide investors global exposure to companies that are less dependent on fossil fuels by tracking the MSCI ACWI Low Carbon Target Index and charge 0.20% in expense ratio. While financials is the top sector and American firms dominate half of the portfolio of both the funds, CRBN is more popular and liquid with AUM of $367.8 million and average daily volume of 13,000 shares. In contrast, LOWC has amassed $135.5 million in its asset base while trades in a paltry volume of around 1,000 shares. However, CRBN is less diversified with 1,192 securities compared with 1,572 for LOWC (read: Sustainable Investing: What Is It and Why Is It Hot Now?).
Women-Based ETFs
SPDR SSGA Gender Diversity Index ETF (SHE - Free Report) vs. Barclays Women in Leadership ETN
Though both funds target companies that exhibit gender diversity in their senior leadership position, they have a different approach. SHE tracks the SSGA Gender Diversity Index and holds 186 stocks in its basket. It has accumulated $294.3 million in its asset base since its debut a year ago and trades in meager volume of under 3,000 shares (read: 6 Successful ETF Launches of 2016).
On the other hand, WIL is an ETN option that follows the Women in Leadership Index, which provides exposure to U.S. companies that have either female CEOs or at least 25% female members on their board of directors. It has been often overlooked by investors as depicted by its AUM of just $33.4 million and average daily volume of about 300 shares. Additionally, the note charges higher fee of 45 bps compared to 0.20% for SHE.
Fossil-Fuel Free ETFs
SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX - Free Report) vs. Etho Climate Leadership U.S. ETF (ETHO - Free Report)
While the duo offers exposure to the U.S. "fossil fuel free" companies, they have varied methodology. SPYX follows the S&P 500 Fossil Fuel Free Index and holds 473 stocks in its portfolio. It has been able to gather $136.6 million in its asset and charges 20 bps in fees per year from investors. Volume is light and exchanges 7,000 shares in hand a day on average. On the other hand, ETHO tracks the Etho Climate Leadership Index, holding 371 securities. The product has amassed $13.2 million in its asset base while trades in average daily volume of more than 3,000 shares. It charges 49 bps in annual fees from investors (read: ETFs for a Green Portfolio on Earth Day).
Want to learn more about sustainable investing? Check out our podcast below for additional information!
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>