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Vanguard Plans to Foray Into ESG ETF Space

Sanghamitra Saha
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Among many new concepts that the ETF industry has been trying lately, socially relevant funds have been gaining considerable issuers’ and investors’ attention. Companies that focus heavily on environmental, social and governance (ESG) practices are much sought-after by investors, if we go by BlackRock (read: Guide to Socially Responsible ETFs).

Notably, 70% of all investors are interested in socially responsible investing, while more than 80% of millennials seeks socially responsible ways to invest, per data by Morningstar.

No wonder, issuers are rolling out products specifically targeting the ESG criteria. Most recently, Vanguard joined the bandwagon, having filed two such products. The newbies will complement Vanguard’s existing FTSE Social Index Fund and will likely start trading from September.

The FTSE will first target its broad domestic and international stock indexes and eliminate stocks of companies from adult entertainment, alcohol, tobacco, weapons, fossil fuels, gambling, and nuclear power, per Vanguard. Companies that do not conform to United Nations standards regarding labor, human rights, the environment and corruption will also not manage a place in the indexes.

Vanguard ESG U.S. Stock ETF

The underlying index of the fund looks to measure the performance of large-, mid-, and small-capitalization stocks of companies, which are screened on the basis of ESG criteria. The fund will charge 12 bps in fees (read: Vanguard Action to Make ETF Investing More Affordable).

Vanguard ESG International Stock

Here the fund will follow large-, mid-, and small-capitalization companies of developed and emerging markets outside the United States. These stocks will also be picked on the basis of some ESG factors. It will charge 15 bps in fees (read: 5 Europe ETFs With Great ESG Scores).

How Does It Fit in a Portfolio?

If approved, these funds will be the lowest-cost ESG products, per Vanguard. The ESG investing theme is in vogue right now. Investors appear to be bothered about the future of the environment and the effect it might have on their investing portfolio (read: Sustainable ETFs Gather Momentum: What's Behind the Surge).

Apart from the social standpoint, this investing practice also offers substantial gains to investors. This is because lesser focus on environmental issues by the companies may result in lawsuits, fines and damages, per the source,.

ETF Competition

So far, the lowest-cost ESG ETF available is from iShares —iShares ESG 1-5 Year USD Corporate Bond ETF (SUSB) — charging 12 bps in fees. However, this is a bond fund. In the equity spectrum, the lowest cost fund available is iShares MSCI USA ESG Optimized ETF (ESGU), charging 15 bps. Since Vanguard’sU.S.-based ETF charges less than ESGU, the newbie should see success, if approved.

From the international perspective,iShares MSCI ACWI Low Carbon Target ETF (CRBN) with global exposure charges 20 bps in fees. Since the United States takes about half of the fund, CRBN doesn’t become an exact competitor to Vanguard’s international ETF.

Columbia Sustainable International Equity Income ETF (ESGN), which charges 45 bps in fees, should be compared with the international version of Vanguard’s proposed fund. Notably, there are not many ESG funds that have ex-U.S. exposure (considering both developed and emerging economies). So, expense ratio-wise and investment objective-wise, the proposed Vanguard funds should not face steep competition.

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ISHARS-M L CRBN (CRBN): ETF Research Reports
 
COL-SUS INT EI (ESGN): ETF Research Reports
 
ISHR-ESG 1-5USD (SUSB): ETF Research Reports
 
ISHR-MS USA ESG (ESGU): ETF Research Reports
 
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