(Catherine Brock)
If one of your 2022 resolutions is to do more to support the planet and its people, good news: ESG ETFs can help. ESG ETFs invest in companies that work for the protection of the environment, support people and operate in full transparency.
You also won’t be the only investor to adopt ESG ETFs in 2022. ESG researcher MSCI predicts that ESG analysis will soon become standard practice for traditional investors. The researcher also believes that more investors will fund companies that specifically support environmental initiatives.
Here are two essential steps to start investing in ESG ETFs this year, as well as five popular funds to watch out for.
1. Clarify your goals
ESG stands for environment, social and governance. These three areas provide a framework for companies to organize and report on their sustainability initiatives.
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The three-pronged ESG framework allows a company to demonstrate different strengths and weaknesses in sustainability. For example, some organizations may have effective environmental programs alongside weaker records of social initiatives.
This is why it helps to clarify your own goals before you embark on ESG investing. There are many investable ESG ETFs. Some focus on the good behavior of companies in all three categories. Others answer specific ESG questions, like clean energy or women in leadership.
Clarifying the behaviors you want to support up front helps you narrow down your scope of appropriate funds faster. You are also more likely to be happy with your ESG choices over the long term.
2. Look for ESG indices
In the next step, do some preliminary research on ESG indices. Most ESG ETFs that you will consider tracking have an index. The different indices in the ESG space all have their own methods for including or excluding constituents. Examining indices and how they are constructed should help you formulate what you want and what you don’t want in your portfolio.
Look at MSCI, Morningstar, FTSE and S&P for ESG-focused indices.
ETFs for new ESG investors
ETFs are a good starting point for your ESG holdings for several reasons. First, ETFs are diversified. You get exposure to dozens (and sometimes hundreds) of companies in every stock.
Second, ETFs do not have high minimum purchase requirements. Some mutual funds require you to purchase $ 3,000 or more. But you only need to buy one share of an ETF.
Also remember that your participation in an ESG fund is an investment and not a donation. Yes, the right ESG ETF matches your values, but it also provides acceptable financial returns. As such, you should assess your ESG fund options the same way you assess any potential security. At a minimum, look at the track record, size and expense ratio of the fund.
ESG ETFs to watch
The table below shows five popular ESG ETFs, along with their size and expense ratio.
|
Fund name |
Type |
Fund size |
Expense ratio |
|---|---|---|---|
|
SPDR Financial Select Sector Fund (NYSEMKT: XLF) |
Index fund that tracks Sector financial selection index |
$ 44.7 billion |
0.12% |
|
Vanguard ESG U.S. Equity ETF (NYSEMKT: ESGV) |
Index fund that tracks FTSE US Cap Global Choice Index |
$ 5.9 billion |
0.09% |
|
Social ETF iShares MSCI KLD 400 (NYSEMKT: DSI) |
Index fund that tracks MSCI KLD 400 social index |
$ 4.2 billion |
0.25% |
|
IShares Global Clean Energy ETF (NASDAQ: ICLN) |
Index fund that tracks S&P Global Clean Energy Index |
$ 5.6 billion |
0.42% |
|
SPDR S&P 500 Fossil Fuel Reserve ETF Free (NEW: SPYX) |
Index fund that tracks S&P 500 Index Fossil Fuel Free |
$ 1.4 billion |
0.20% |
Data sources: SSGA, Vanguard and iShares.
The five funds are passively managed index funds, but each has a different type of exposure. The Financial Select Sector SPDR Fund, for example, invests in national financial companies. ESG performance is not an investment criterion in itself. But because these companies have an excellent ESG track record, the fund has the highest possible MSCI ESG rating.
Vanguard’s fund tracks the FTSE US All Cap Global Choice Index. This index includes companies of all sizes with a strong ESG track record. In addition, the index eliminates companies in certain industries that some find unattractive, including weapons and gambling. It also excludes companies that are the subject of controversies regarding human and labor rights, environmental practices and business ethics.
The iShares MSCI KLD 400 Social ETF tracks the MSCI KLD 400 social index. Like the FTSE index, the MSCI index includes companies with excellent ESG performance and specifically excludes certain sectors and securities transactions.
The iShares Global Clean Energy ETF invests in clean energy companies around the world. And the SPDR S&P 500 Fossil Fuel Reserves Free ETF invests in S&P 500 companies that do not maintain fossil fuel reserves.
ESG investment for 2022
ESG investing has seen a dramatic increase in popularity over the past few years. And there is no indication that the trend will slow down, which bodes well for ESG investors and the global community.
If you invest in sustainability this year, you can feel good about making the world a better place while pursuing your wealth goals. It’s a win-win.
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Catherine Brock has no position in the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
