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ESG Investing is Bringing Outperformance at a Lower Cost

Outperformance at a cheap cost–it’s an investor’s dream and right now, environmental, social, and governance (ESG) investing is offering just that. Despite the Covid-19 pandemic, ESG is ousting the broad market, which is only enhancing investor interest.

 

“Expense ratios on ESG funds have plummeted in recent years as the funds have gained popularity, and most have more than enough diversification to eliminate any nonsystemic risk,” a Wall Street Journal article said. “The Vanguard ESG U.S. Stock ETF (ESGV) has a net expense ratio of 0.12% and holds 1,478 stocks. The iShares ESG Aware Agg Bond ETF (EAGG) costs 0.10%, and holds 2,497 bonds.”

 

“More studies on ESG funds have found overperformance than underperformance, although ESG funds haven’t been around long enough to say anything conclusive. ESG funds might choose to shun one or two value sectors, such as Big Oil, but that still leaves many other value sectors available for ripe picking,” the article added.

 

The Rise of ESG in 2020

More and more investors are asking for ESG-focused products that not only achieve target returns but also focus on topics investors care about, such as climate change or renewable energy sources. ESG is starting to make an impact in the investment arena and more interest through the rest of 2020 should follow.

 

The challenge for these ESG funds is giving investors what they want, which is more ESG offerings, but at the same time, trying to generate a return. Because of this unprecedented growth in recent times, ESG is now drawing the attention of regulators just as the topic became one of the most searched financial terms in 2019, according to a 401(k) Specialist post.

 

Investors looking to capitalize on ESG can also do so via ETFs. BlackRock’s iShares brand supports some of the most widely held ESG ETFs, including the iShares ESG MSCI USA Leaders ETF (SUSL), iShares MSCI KLD 400 Social ETF (NYSEArca: DSI) , and the iShares MSCI USA ESG Select ETF (NYSEARCA: SUSA).

 

ESG ETF Options Aplenty

Other funds to look at include the FlexShares STOXX US ESG Impact Index Fund (CBOE: ESG). For investors who want ESG exposure, as well as global diversification, can look to the FlexShares STOXX Global ESG Impact Index Fund (CBOE: ESGG).

 

ESG seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the STOXX® USA ESG Impact Index. The underlying index is designed to reflect the performance of a selection of companies that, in aggregate, possess greater exposure to ESG characteristics relative to the STOXX® USA 900 Index, a float-adjusted market-capitalization weighted index of U.S.- incorporated companies. Under normal circumstances, the fund will invest at least 80% of its total assets in the securities of the underlying index.

 

ESGG seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the STOXX® Global ESG Impact Index. The index is designed to reflect the performance of a selection of companies that, in aggregate, possess greater exposure to environmental, social, and governance characteristics relative to the STOXX® Global 1800 Index, a float-adjusted market-capitalization weighted index of companies incorporated in the U.S. or in developed international markets. The fund will invest at least 80% of its total assets in the securities of the index and in ADRs and GDRs based on the securities in the index.

 

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