4 ESG ETFs To Invest For The Long Term

Jun 18, 2021 07:06 PM ET
4 ESG ETFs To Invest For The Long Term

Exchange-traded funds tracking companies with a high Environmental, Social, and Governance (ESG) score are gaining popularity among investors. According to Bloomberg, the total assets held by ESG-friendly funds are expected to reach more than $53 trillion in the next four years. This is a substantial growth considering that the industry held more than $22.6 trillion in assets in 2016. Most of these assets are held in Europe, followed by the United States. 

In this article, we will look at some of the most popular ESG funds to invest in for the long term. 

What is ESG?

ESG stands for environment, social, and governance. With the environmental concerns, investors look at companies paying special attention to environmental issues and those that are actively cutting their carbon emissions. For example, they invest in a company like Apple that has committed to be carbon neutral by 2030. 

They also invest in companies like Microsoft and Facebook that have committed to reducing their carbon emissions. While most ESG funds avoid oil and gas companies, some invest in energy companies that reduce their emissions or have committed to investing in clean energy.

On the social scale, ESG funds look at companies that are keen on social issues of the day. This includes those that have increased their share of physical challenges and under-represented people in society. Some of these are black and Hispanic individuals or those who identify as gays and lesbians.

On governance, investors look at how companies make decisions. For example, recently, the Business Roundtable said that member companies should look above profits in their operations. As such, ESG funds look at companies that care about their shareholders. 

iShares ESG Aware USA ETF (ESGU)

  • Total assets: $17.85 billion.

  • Expense ratio: 0.15%.

Started in 2016, the iShares ESG Aware USA ETF is a leading ETF that tracks the MSCI USA index. It invests in large and mid-cap American companies that have the best ESG practices. It has an expense ratio of about 0.15%. Notably, the fund avoids companies in the tobacco, weapons, and coal business.

It has more than 300 constituent companies, with some of the biggest members being firms like Amazon, Apple, Microsoft, Facebook, and JP Morgan. It sees these companies as being at the forefront in making changes that are in line with environmental, social, and governance issues. The fund has an ESG rating of five stars from Morningstar. Also, most companies in the fund have a triple-A rating by MSCI.

It is worth noting that the biggest member companies of the ESGU ETF are also the biggest companies in the S&P 500. As such, the fund tends to perform in line with the S&P 500 index, as shown below. 

ESGU vs S&P 500

ESGU vs S&P 500

Therefore, while its expense ratio is 0.15%, investing in a cheaper S&P 500 ETF makes sense for investors who are interested in saving money.

iShares Global Clean Energy ETF (ICLN)

  • Total assets: $5.85 billion.

  • Expense ratio: 0.46%.

As you will note, most ESG funds are typically made up of the same constituent companies like Facebook and Alphabet. As such, if you want diversification, investing in ESG funds that focus on specific issues can help you achieve uncorrelated returns.

The ICLN is a sector-specific ETF that focuses on clean energy like solar, wind, and renewable sources. The ETF is global, meaning that it invests in companies that are based globally. Some of the biggest constituent companies are Vestas Wind Systems (VWS), Orsted (ORSTED), Enphase Energy (ENPH), and Plug Power (PLUG). 

Vestas is one of the biggest operators of wind farms globally, while Plug Power is a leading provider of hydrogen solutions. NextEra, on the other hand, is a power utility company that focuses on solar and wind. The ETF has 82 companies and has an expense ratio of 0.46%. This makes it more expensive than most ETFs.

Some of the benefits of investing in the ICLN fund are that it has some of the best-known companies in clean energy. 

ICLN vs S&P 500

ICLN vs S&P 500

It is also ideal during the Joe Biden administration since he has unveiled a plan to invest trillions of dollars in clean energy. The chart above shows the performance of the ICLN fund.

SPDR S&P 500 Fossil Fuel Free Reserves Free ETF (SPYX)

  • Total assets: $1.1 billion.

  • Expense ratio: 0.20%.

The SPYX ETF is a straightforward fund. It basically invests in companies in the S&P 500 that are not in the fossil fuel industry. This means it excludes companies like Occidental, ExxonMobil, and Chevron. It tracks the S&P® 500 Fossil Fuel Free Index, leaving around 489 companies in the ETF. 

Most of these are small-cap firms in the information technology sector, followed by health care, consumer discretionary, financials, and communication.

SPYX vs S&P 500

SPYX vs S&P 500

The SPYY has an expense ratio of 0.20% and has a track record of outperforming the S&P 500 as shown in the chart above.

Nuveen ESG Small-Cap ETF (NUSC)

  • Total assets: $955 million.

  • Expense ratio: 0.40%

The Nuveen ESG small-cap ETF is another distinct ESG fund in that it is made up of small-cap companies that are not available in large funds. It has more than $900 billion in assets and an expense ratio of 0.40%. Being small-caps, most of these companies are usually domestic in nature. It tracks the TIAA ESG USA Small-Cap Index.

Some of the biggest constituent companies of the NUSC ETF are Darling Ingredients, Wex, Reliance Steel & Aluminum, Popular Inc., and Toro. It has a five-star rating by Morning Star.

NUSC vs S&P 500

NUSC vs S&P 500

The benefit of investing in NUSC is that it provides you with uncorrelated returns. It also gives you exposure to small cap companies in the United States.

Summary

The ESG rating has become an important criterion of the global investing universe. There are hundreds of ETFs that have been created to track the compliant companies. Still, the four funds we have looked at here will help you achieve good returns and diversify your portfolio.


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