This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article features Greg Lessard, founder and president of Aspen Leaf Partners, a registered investment advisor (RIA) in Golden, Colorado.
Modern-day socially responsible investing looks a lot different than it did just a decade ago.
Investment managers today regularly look at environmental, social and governance (ESG) criteria when selecting investments. Rigid exclusionary tactics of eliminating entire industries are being replaced by a positive overweighting methodology. Product providers are licensing ESG-branded indexes with increasing popularity.
Just a few years ago, it was impossible to build a diversified ESG portfolio with index funds, let alone ETFs. An investor was forced to purchase individual stocks or conventional ’40 Act mutual funds. That is changing, quickly.
MSCI alone has already developed 11 ESG indexes, and ETF powerhouses like iShares are bringing these indexes to the market. For investors seeking low cost, tax efficiency and ESG values, a globally diversified portfolio is now achievable.
ESG And Performance
To be clear, applying ESG criteria does not increase risk and stifle performance. It’s just the opposite.
In 2012, Deutsche Bank Group analyzed more than 150 academic studies and research papers covering sustainable investing. It found that 89 percent of the studies showed that corporations with high ESG ratings also demonstrated market-based outperformance. More recently, MSCI examined ESG “tilt” and “momentum” strategies. The strategies outperformed their conventional benchmarks by 1.1 percent and 2.2 percent, respectively.
The academic research on stock ESG criteria is spilling over to the indexes’ ESG-branded ETFs track. This chart represents data from 10/1/2007 through 6/30/2015.
For a larger view, please click on the image above.
Diversified asset allocation is part art, part science. An ESG portfolio should follow the same portfolio construction you’re already using. I won’t tell you what percentages to use, nor will I argue if you want to include alternatives such as real estate, commodities or hedged strategies. That’s up to you.
But here’s a list of ETFs broken out by their “best fit” asset class. It is not an exhaustive list, and will probably look different a year down the road, but it’s a good starting point for investors interested in ESG investing.
Remember that not all investments neatly fit into the E, S, or G criteria. You may find corporations in one ETF that have strong corporate governance but suffer in their social track record. If you want to achieve competitive risk adjusted returns, it’s been argued you can’t buy just a few stocks. Although not perfect, investors can pretty well cover the major asset classes with the ETF options below:
- iShares MSCI KLD 400 Social ETF (DSI | A-92), 0.50 percent expense ratio; some midcap exposure
U.S. Mid- and Small-Cap
- Vident Core U.S. Equity (VUSE | B-70), 0.58 percent expense ratio; focus is on governance, with little to no regard for the “E” or “S”
- Vident International Equity (VIDI | D-64), 0.75 percent expense ratio; focus is on the “G” in ESG
- Vident Core U.S. Bond Strategy ETF (VBND | C), 0.45 percent expense ratio; more “G” focus
- SPDR Nuveen Barclays Short Term Muni Bond ETF (SHM | B-69), 0.20 percent expense ratio; unconventional ESG option, especially for IRAs, but one that avoids Treasurys
- AdvisorShares Global Echo ETF (GIVE | F-65), expensive at 1.61 percent expense ratio, but a good option for smaller accounts
- iShares MSCI ACWI Low Carbon Target ETF (CRBN | D-95), 0.20 percent expense ratio; about 50/50 U.S. versus international exposure, some exposure to midcaps
- Workplace Equality ETF (EQLT | C-62), 0.75 percent expense ratio; large-cap with decent mid- and small-cap exposure with a sprinkling of international equity
- PowerShares Water Resources ETF (PHO | A-46), 0.61 percent expense ratio
- Market Vectors Global Alternative Energy (GEX | B-21), 0.62 percent expense ratio; good multicap strategy
Aspen Leaf Partners is a fee-only financial advisory practice located in Golden, Colorado. The firm manages approximately $18 million in retail client assets, using ETFs and index funds. Our specialty is our low-cost, tax-efficient, ESG titled Green Return Portfolios. Almost all the ETFs and index funds mentioned in this article are owned by Aspen Leaf clients, as well as the author. Click here for our investment philosophy.
Disclosure: Nothing in this article should be construed as investment advice. We went out of our way to present unbiased data believed to be from extremely reliable and respected sources. However, its accuracy, completeness and relevance are not guaranteed, and no responsibility is assumed for errors or omissions. Historical risk/return performance is certainly no guarantee of future results. We encourage you to discuss any financial strategy with your personal financial advisor, and always read the prospectus before purchasing any investment.
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