Investors are not socially distancing from ESG (environmental, social, and governance) funds, which are designed to avoid “sin” stocks and ill-managed companies, suggests Richard Moroney, editor of Dow Theory Forecasts, a financial newsletter first published in 1946.
In the first half of 2020, investors poured some $21 billion into U.S. ESG-related funds, exceeding the four-year total from 2015 to 2018, according to Morningstar. ESG funds are sometimes called sustainable or socially responsible funds.
ESG funds have multiplied rapidly, spurred by heightened awareness of workplace diversity and equal-employment opportunities, climate change, and ethical business practices, among other things.
While many funds have added ESG screens to their investment processes, the universe of socially responsible funds remains small.
By our count, about 115 exchange-traded funds adhere to dedicated ESG strategies. Only 22 have five-year track records.
To be sure, ESG criteria are hard to define and largely subjective, with few accepted standards governing what can be called a socially responsible investment.
For example, many ESG funds have sizable stakes in oil-and-gas companies, despite the environmental impact of fossil fuels. It is worth noting that many ESG portfolios have outsized positions in technology companies, partly reflecting their low carbon footprint and relatively healthy corporate citizenship.
Investors can use Morningstar’s sustainability rating to gauge a fund’s social responsibility. Morningstar considers a fund’s underlying holdings; high ratings imply more assets invested in stocks with lower ESG risk.
The table above lists 14 ESG funds with solid track records and modest expense ratios. Morningstar generates sustainability ratings for 12 of the ETFs, and they earn four or five globes.
- iShares 1-5 Year Corporate Bond (SUSB) holds more than 830 short-term investment-grade bonds from issuers with favorable ESG characteristics. Financials represent 33% of the portfolio, with consumer staples at 15%. The fund sports a trailing yield of 2.3% and SEC yield of 1.8%.
- Tracking one of oldest ESG indexes, iShares MSCI KLD 400 Social (DSI) focuses on large-caps and avoids companies engaged in alcohol, firearms, gambling, and nuclear power, to name a few. The ETF is about 33% invested in technology, paced by a 10% allocation in Microsoft (MSFT). Up 13% so far in 2020, the fund ranks among the top 10% of its category for five-year returns.