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Demand Hot For iShares ESG Funds

Lara Crigger

The iShares ESG MSCI U.S.A. ETF (ESGU) just became the latest environmental, social and governance (ESG) ETF to break $1 billion in assets under management (AUM).

Month to date, ESGU has taken in $700 million, pushing the formerly average-sized fund from $296 million in AUM to $1.01 billion. On Sept. 10, the fund brought in $498 million alone, its largest one-day flow ever:

 

Source: ETF.com data. Data as of Sept. 12, 2019.

 

ESGU's inflows place it in a billion-dollar category that counts only four other socially responsible ETFs as members, including the $1.6 billion iShares ESG MSCI USA Leaders ETF (SUSL) and the $1.4 billion Xtrackers MSCI U.S.A. ESG Leaders Equity ETF (USSG).

Other top funds include the two oldest ESG ETFs, the $1.2 billion iShares MSCI USG ESG Select ETF (SUSA) and the $1.5 billion iShares MSCI KLD 400 Social ETF (DSI), which launched in 2005 and 2006, respectively.

iShares Takes Over ESG

Four of the top five largest ESG ETFs are now from BlackRock, which, over the course of 2019, has quietly accrued significant assets in that lineup.

Year to date, the 14 iShares ESG products have brought in $3.6 billion in new assets, more than any other issuer's lineup. Not even Vanguard comes close; its two ESG ETFs have brought in $808 million.

ESGU was the second-highest asset gainer year to date, after SUSL:

 

Source: ETF.com; data range from Jan. 1 to Sept. 12

Little Difference Between The Top 5

Intriguingly, with ESGU's new influx of cash, there now appears to be even less difference separating the five largest ESG ETFs—even though four are from the same issuer.

All five funds track the same market segment of U.S. large cap equities (though technically SUSL and the iShares MSCI KLD 400 Social ETF (DSI) dip slightly into midcaps as well).

All five attempt to provide marketlike exposure and use MSCI indexes as their baseline, from which offending stocks are ejected based on nearly identical criteria, such as involvement in weapons manufacturing, or the alcohol and tobacco industries.

All five then rank and weight their remaining stocks using similar criteria, including factors like a company's labor practices, its impact on the environment, and its history with corporate fraud or corruption.

All five have similar portfolios and similar performance. Over the past three months (the longest time period for which data is available), all five have performed within a percentage point of each other:

 

Source: StockCharts.com; data as of Sept. 12, 2019

 

Last—but definitely not least—to consider: All five funds are priced at 0.25% or less.

Hedging Bets

Of course, minor differences exist between the top five funds in terms of thresholds for inclusion or how industry-specific exclusions are defined. Functionally, however, USSG, ESGU, DSI, SUSL and SUSA are almost all exactly the same fund.

In other words, more than $6.6 billion—or 42% of all dollars invested in ESG ETF products—is invested in clones of the same basic fund archetype.

That's not a phenomenon unique to ESG, of course; just take a look at the horse race between broad-based S&P 500 funds such as the SPDR S&P 500 ETF Trust (SPY), the Vanguard S&P 500 ETF (VOO) and iShares Core S&P 500 ETF (IVV).

But taken in context, particularly Ilmarinen's decision earlier this year to seed two copies of roughly the same ETF—the Xtrackers MSCI U.S.A. EG Leaders Equity ETF (USSG) and the iShares ESG MSCI USA Leaders ETF (SUSL)—it suggests many investors still perceive ESG ETFs as a chance that they're taking; one for which they need to hedge their bets.

Contact Lara Crigger at lcrigger@etf.com

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