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For ESG ETFs, Backing Matters

ETF Professor

There are more than 80 exchange traded funds listed in the United States that adhere to environmental, social and governance (ESG) investing principles and while that universe is growing in population terms, it has not always been a primary destination for advisors and investors looking to put capital to work.

That trend could be shifting as a pair of newly minted ESG ETFs, with the help of a large institutional investor, are packing on assets at a rapid rate.

What Happened

The Xtrackers MSCI USA ESG Leaders Equity ETF (NYSE: USSG) debuted in March while the iShares ESG MSCI USA Leaders ETF (NASDAQ: SUSL), which features a similar methodology as USSG, debuted earlier this month. Last week, both ETFs topped $1 billion in assets under management.

As of May 24, USSG and SUSL had $1.19 billion in and $1.16 billion in assets under management, respectively.

Why It's Important

Both of those ESG ETFs were launched in partnership with the Ilmarinen, Finland's largest pension insurance company. Ilmarinen provided seed capital for both ETFs, helping USSG and SUSL each debut with more than $800 million in assets.

That is quite an advantage, but the new ETFs' ascents to the $1 billion should not be diminished. At their current asset levels, USSG and SUSL are the second- and third-largest ESG ETFs, respectively, trading in the U.S.

In a matter of days, SUSL, USSG or both could take the crown of the largest U.S.-listed ESG ETF from the iShares MSCI KLD 400 Social ETF (NYSE: DSI). DSI had $1.38 billion in assets under management as of May 24, but that fund is nearly 13 years old. DSI, SUSL and USSG are three of the four ESG ETFs with more than $1 billion in assets under management.

What's Next

The two new ESG ETFs track the MSCI USA ESG Leaders Index, but investors should not expect mirror images when it comes to performance.

SUSL, the iShares fund, charges 0.15 percent per year, or $15 on a $10,000 investment. Conversely, USSG charges 0.10 percent annually, making it one of the cheapest ESG ETFs on the market today.

Both funds have traditional ESG approaches, including the exclusion of alcohol and tobacco companies, casino operators and makers of civilian firearms.

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