Key Takeaways
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iShares ESG Aware MSCI USA ETF (ESGU 76 *****) earns CFRA’s top rating for the ETF’s record and appealing holdings.
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While the fund holds many of the same stocks inside traditional core equity strategies, it has a higher weighting in some attractive stocks, such as salesforce.com (CRM 251 ****).
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CFRA sees ESGU as generating a strong risk-adjusted record and we think that it is well positioned for future outperformance of the U.S. equity category.
Fundamental Context
The CFRA Focus Mutual Fund for October is iShares ESG Aware MSCI USA ETF (ESGU). To rate equity ETFs, CFRA combines a review of the fund’s record with an assessment of the reward and risk potential of the portfolio. ESGU has outperformed the S&P 500 Index on a year-to-date (7.4% vs. 4.7%), one-year (18% vs. 14%), and three-year total return basis (13% vs. 12%), even though ESGU excludes companies that fail to meet the environmental, social, and governance (ESG) standards set by index provider MSCI. The ETF holds 346 large- and mid-cap companies that have positive ESG characteristics. After excluding companies involved in the business of tobacco and controversial weapons as well as securities of companies involved in very severe business controversies (as determined by MSCI). The fund also follows a quantitative process that is designed to determine optimal weights for securities to maximize exposure to companies with higher ESG ratings, subject to maintaining risk and return characteristics similar to the MSCI USA Index.
What is favored by an ESGETF matters as much as what is inside. Many of ESGU’s top holdings are comparable to iShares Core S&P 500 ETF (IVV 336 *****). CFRA Buy recommended Amazon.com (AMZN 3,149****) and Apple (AAPL 116 *****) and CFRA Strong Buy recommended Microsoft (MSFT 210 *****) are the three largest positions, representing a combined 17% of assets, matching IVV. However, ESGU has less exposure to some mega-cap companies, such as Hold recommended Berkshire Hathaway (BRK.B 213 ***), and more exposure to others, such as CFRA Buy recommended salesforce.com (CRM 251 ****).
CFRA’s Buy recommendation is not directly driven by our assessment of CRM’s ESG attributes, but rather our traditional fundamental and valuation analysis. CFRA Equity Analyst John Freeman explains his Buy recommendation is based on what he sees as a reasonable valuation for one of the most disruptive innovators in enterprise software. He sees CRM generating revenue growth of 22% on a compounded annualized growth basis over the next three years.
Our five-star rating on ESGU is driven by a positive view of the portfolio from a risk and a reward perspective. In addition to including CFRA’s qualitative analyst-driven STARS recommendations, we assess the holdings from a forensic accounting perspective. Nine of the fund’s recent top-10 holdings had favorable CFRA Earnings Quality scores.
ESGU’s sector exposure is like the broader market, despite an ESG filter. While many investors think of ESG ETFs as heavily exposed to Information Technology and under exposed to Energy, there’s little distinction between the ETF and IVV.
In late September, ESGU had 28% of assets in the tech sector, under the 29% stake for IVV. Meanwhile, both ETFs had 2.0% assets in Energy. Exxon Mobil (XOM 34 ***) and Chevron (CVX 72 ***) are among the holdings found in ESGU.
The fund has gathered $6.3 billion of net inflows year-to-date through September 29, more than any other ESG ETF. We think advisors and end investors have begun looking to build asset allocation strategies using ESG products. Thus, the fund’s low 0.15% expense ratio and growing trading volume have helped justify using ESGU.
Conclusion
We think investors seeking an ESG ETF should consider ESGU. This five-star rated fund has appealing holdings as CFRA looks forward and generated strong and consistent returns. We believe ESGU is positioned to outperform its U.S. equity ETF universe over the next nine months.
All of the views expressed in this research report accurately reflect the research analyst’s personal views regarding any and all of the subject securities or issuers. No part of the analyst’s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. For more information and disclosures, please refer to CFRA’s Legal Notice at https://www.cfraresearch.com/legal/.
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