These low-cost ETF portfolios are designed to deliver potent asset-class exposures to ESG-conscious investors saving for retirement.
Interest in sustainable mutual funds–also called ESG (environmental, social, governance) funds–has been soaring. The group gathered more than $50 billion in new assets in 2020, more than double the total assets gathered in 2019 and 10 times more than the inflows in 2018.
Those assets are coming from investors at all life stages, but younger investors appear to have a particular affinity for ESG investing. According to Morgan Stanley research, 87% of millennials (people born between the early 1980s and 2000) say a company’s track record on ESG matters is an important consideration when deciding whether to invest in it.
My model Retirement Saver ESG portfolios are geared toward ESG-minded investors who are still working and accumulating assets for retirement: 20-somethings, 50-somethings, and everyone in between. I’ve created a suite of traditional mutual fund portfolios geared toward retirement savers, and I’ve also created ESG Retirement Saver portfolios composed of exchange-traded funds. As with the other model portfolios, I relied on Morningstar’s Lifetime Allocation Indexes to help set the portfolios’ asset-class exposures. Jon Hale, Morningstar’s director of sustainability research for the Americas, and Morningstar’s passive strategies researchers helped me determine which ETFs to include in the portfolios.
As I put the ETF portfolios together, I was struck by the quality, breadth, and low costs of the ETFs available with ESG mandates. Indeed, passive products have been a particularly high-growth pocket of the ESG arena, gathering assets and spawning new fund launches. In 2020, for example, about 70% of new inflows into ESG products went into passive products, mainly ETFs.
Moreover, ETF investors can now find low-cost products in all of the major asset classes, making it fairly simple to create a well-diversified, low-cost portfolio consisting of securities with good ESG attributes. I’ve created four suites of ESG portfolios: ETF portfolios geared toward retirees as well as retirement savers, and traditional mutual fund portfolios created toward those same groups.
Aggressive ESG ETF Retirement Saver Portfolio
50%: iShares ESG MSCI USA ETF (ESGU)
10%: iShares ESG MSCI USA Small-Cap ETF (ESML)
30%: iShares ESG MSCI EAFE ETF (ESGD)
5%: iShares ESG MSCI Emerging Markets ETF (ESGE)
5%: iShares ESG U.S. Aggregate Bond ETF (EAGG)
The bulk of this aggressive portfolio, geared toward young accumulators in their 20s and 30s, is a globally diversified equity basket designed to supply the portfolio with long-term growth. The iShares’ equity ETFs that dominate the portfolio all track ESG indexes crafted by MSCI. Note that these ETFs were all designed to track their “parent” index fairly closely: For example, ESGE is designed to closely track the MSCI Emerging Markets Index.
To add a bit of diversification and reduce volatility, I included a small stake in EAGG to provide core fixed-income exposure. It should provide performance that closely resembles its parent index, the Bloomberg Barclays U.S. Aggregate Bond Index. As such, it should be reliable ballast in equity-market shocks.
Moderate ESG ETF Retirement Saver Portfolio
47%: iShares ESG MSCI USA
8%: iShares ESG MSCI USA Small-Cap ETF
20%: iShares ESG MSCI EAFE ETF
5%: iShares ESG MSCI Emerging Markets ETF
20%: iShares ESG U.S. Aggregate Bond ETF
Conservative ESG ETF Retirement Saver Portfolio
33%: iShares ESG MSCI USA
5%: iShares ESG MSCI USA Small-Cap ETF
10%: iShares ESG MSCI EAFE ETF
4%: iShares ESG MSCI Emerging Markets ETF
30%: iShares ESG U.S. Aggregate Bond ETF
11%: iShares ESG 1-5 Year USD Corporate Bond ETF (SUSB)
7%: iShares TIPS Bond ETF (TIP)
Because this portfolio is geared toward people for whom retirement is close at hand, its fixed-income exposure is larger. But while ESG bond funds have grown rapidly in number, noncore ESG bond options are sparse. For short-term exposure, I relied on iShares ESG 1-5 Year USD Corporate Bond. However, an investor who isn’t comfortable with the credit risk inherent in a corporate-bond-heavy fund like that one could reasonably use a short-term U.S. government-bond fund such as iShares Short Treasury Bond ETF (SHV) or Vanguard Short-Term Treasury ETF (VGSH). After all, U.S. government bonds figure prominently in most core ESG bond funds, so an ESG investor could reasonably focus her fixed-income exposure, or a portion of it, on such bonds. Using that same logic, I used iShares TIPS Bond ETF TIP to provide inflation protection. (Treasury Inflation-Protected Securities are not a component of Bloomberg Barclays Aggregate indexes.)
How to Use the Portfolios
As with all of the model portfolios, the key goal here is to depict sound asset-allocation and portfolio-maintenance principles rather than to blow the doors off with strong performance.
Because ETFs are ideal “set it and forget it” vehicles, I’ll make changes for rebalancing purposes or when fundamental considerations dictate. It’s also worth noting that this portfolio’s asset allocation won’t make sense for every individual approaching retirement. The Conservative version will tend to be most appropriate for people who are within 10 years of retirement. But people who will fund most of their retirement income needs with a pension and Social Security would likely want to hold a smaller stake in bonds than is featured here, as their portfolio distributions are going to be minimal.
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