A Financial Advisor’s Top Ethics-Based ETFs

A popular and growing method to practice socially responsible investing (SRI) is through a strategy called ethical investing. Through this practice, an investor actively eliminates exchange-traded funds (ETFs) funds based on their individual ethics. An investor may want to target investments based on their environment, health, or human rights practices.

It’s important to be vigilant when selecting ethics-based ETFs because they tend to have higher expense ratios. However, some ETFs offer reduced fees until a specified sunset date. Another risk is that they can concentrate an investor’s portfolio into one industry or company.

In addition, the name of an ethics-based ETF can be misleading. For example, iShare MSCI ACWI Low Carbon Target ETF (CRBN) holds positions in Valero Energy (VLO) and Phillips 66 (PSX), and iShares MSCI USA ESG Select ETF (SUSA) holds positions in Conoco Phillips (COP) and Marathon Oil (MRO). If it is a concern, individual investors should do their own research, paying close attention to all the holdings in an ethics-based ETF. Many of these funds are invested in a large number of companies and there isn’t always strong oversight; even though it doesn’t appear like it based on the name of the fund, some of the holdings in a particular fund may go against an advisor’s personal ethics. (For more, see: A Financial Advisor’s Top Socially Responsible ETFs.)

As the popularity of SRI increases, there are more options for investors who want to prioritize ethics-based ETFs. Most recently, BlackRock released a fund called ESML, a small cap, gun free ETF. With a short operating history, it remains to be seen how it will perform over time. But the appearance of this fund demonstrates that investors’ continued demands for SRI offerings is being met. (See more: Lots of ETFs Have Exposure to Gunmakers, Study Says.)

Here are an advisor’s top ethics-based ETFs as of June 25, 2018:

Large Blend, Excludes Tobacco, Alcohol and Gambling Companies

Name: iShares MSCI KLD 400 Social ETF

Ticker: (DSI)

AUM: $1.1 billion

Expense Ratio: 0.25%

Description: This ETF tracks the MSCI KLD 400 Social Index. This is composed of U.S. companies that have positive ESG programs as identified by the MSCI. MSCI tends to exclude from its index companies that are involved in tobacco, weapons, firearms, alcohol, gambling, and nuclear power.

Likes: Sustainability mandate; liquidity; long track record; distinct voting guidelines that include socially or environmentally responsibility, and advancement of good corporate governance.

Dislikes: Higher cost; fee waiver expires in April 2020 adding 0.25% to the current expense ratio; controversial holdings against SRI; third-party delegation of voting rights to Institutional Shareholder Services.

Invests in Fossil Fuel-Free and Low-Carbon Companies

Name: SPDR S&P 500 Fossil Fuel Reserves Free ETF

Ticker: SPYX

AUM: $286.3 million

Expense Ratio: 0.20%

Description: SPYX tracks the performance of fossil-free companies within the S&P 500 Index. Fossil-free is defined as reserves that are recoverable sources of crude oil, natural gas, and thermal coal. The definition does not include metallurgical or coking coal.

Likes: Sustainability mandate; fossil free; strong corporate governance via discussions related to sustainability-related risks and increased direct communication between board members and shareholders.

Dislikes: Higher cost; short track record; fee waiver expires in October 2018 adding 0.05% to the current expense ratio; controversial holdings against SRI; voting control remains with State Street who votes based on their guidelines.

Invests in Companies With High Diversity/Inclusion

Name: SPDR SSGA Gender Diversity ETF

Ticker: SHE

AUM: $329.8 million

Expense Ratio: 0.20%

Description: SHE provides exposure to large cap U.S. companies that show greater gender diversity within senior management. SHE identifies gender diversity using State Street Global Advisors’s (“SSGA’s”) in-house gender diversity index.

Likes: Sustainability mandate; higher liquidity; diversity and inclusion; strong corporate governance via discussions related to sustainability-related risks and increased direct communication between board members and shareholders.

Dislikes: Higher cost; short track record; controversial holdings against SRI; voting control remains with State Street who votes based on their guidelines; uses in-house gender diversity index.

Invests in Clean Energy Companies

Name: iShares Global Clean Energy ETF

Ticker: ICLN

AUM: $172.6 million

Expense Ratio: 0.48%

Description: Fund tracks the S&P Global Clean Energy Index. It focuses on approximately 30 businesses that are considered the most liquid securities of global clean energy businesses.

Likes: Sustainability mandate; longer track record; global clean energy diversification; strong corporate governance for voting with expectations that portfolio company will report on and will deal effectively with social, ethical and environmental aspects of its business.

Dislikes: Higher cost; lower liquidity; lacks broad diversification; voting control remains with Blackrock who votes based on their guidelines.

Invests in Environmentally-Conscious Companies

Name: VanEck Vectors Environmental Services ETF

Ticker: EVX

AUM: $22.6 million

Expense Ratio: 0.55%

Description: EVX tracks the NYSE Arca Environmental Services Index. Investments include businesses in the environmental services industry domestically or globally. Generally, these companies are involved in waste disposal, removal, or storage.

Likes: Sustainability mandate; longer track record; investments include waste reduction companies; case-by-case voting on corporate and social policy issues.

Dislikes: Higher cost; lower liquidity; lacks broad diversification; voting remains with VanEck who defaults its voting policy to Glass Lewis proxy guidelines.

Invests in Water-Conscious Companies

Name: Invesco S&P Global Water Index ETF

Ticker: CGW

AUM: $577.8 million

Expense Ratio: 0.61%

Description: The fund tracks the S&P Global Water Index. CGW is made up of U.S. and global water related businesses including utilities, infrastruture, and equipment.

Likes: Sustainability mandate; longer track record; higher liquidity; global water diversification; case-by-case voting on corporate and social policy issues.

Dislikes: Higher cost; lacks broad diversification; voting control remains with Invesco who votes based on their guidelines and may default to management discretion.

Invests in Emerging Markets

Name: iShares MSCI EM ESG Optimized ETF

Ticker: ESGE

AUM: $323.6 million

Expense Ratio: 0.25%

Description: ESGE tracks the MSCI Emerging Markets Index. This is made up of large- and mid-cap emerging market equities that have positive environmental, social and governance characteristics as identified

Likes: Sustainability mandate; higher liquidity; emerging market investments; distinct voting guidelines that include socially or environmentally responsibility, and advancement of good corporate governance.

Dislikes: Higher cost; short track record; controversial holdings against SRI; third-party delegation of voting rights to Institutional Shareholder Services.

It’s not challenging to find ethics-based ETF funds, but it is challenging to find ethical investing options that satisfy all of your investment goals, most importantly your individual ethics. Performance varies, so it’s important to do your research about a particular fund’s track record, fees, and shareholder advocacy voting policies. Once you’ve determined that a fund fits into your investment strategy and portfolio, you should move onto determining whether or not all (or the majority) of the companies satisfy your personal values. (For more, see: Ethical Investing: How To Research Ethical Investments.)

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