All in the Name: Breaking Down the FlexShares 'ESG' ETF

Environmental, social, and governance (ESG) has gone from investing buzz phrase to a prominent part of everyday portfolios.

That sentiment is confirmed by a record amount of inflows steadily trickling into ESG exchange traded funds, indicating investors looking for virtuous portfolio applications favor the ETF structure. Over the long haul, that trend should prove efficacious for funds such as the FlexShares STOXX US ESG Impact Index Fund (CBOE: ESG).

Although it’s often overlooked in the ESG ETF conversation, the FlexShares fund should shed that status because it answers one of investors’ primary queries regarding this style of investing: does investing in ESG require leaving returns on the table?

In the case of the $177.36 million ESG, the answer is “no.” It’s up 42.19% over the past year, an advantage of 148 basis points when compared to the S&P 500.

ESG’s Straightforward Approach

One advantage of ESG, the FlexShares ETF that is, is that its approach is easy to understand. That’s important when ESG lacks uniformity. Definitions are often fluid.

“Investors, companies, and regulators are increasingly striving to understand why investments with positive ESG attributes are important to integrate,” notes BlackRock. “However, they might still struggle with how to achieve better ESG outcomes or know what ESG-related information is necessary to make the right investment decisions.”

FlexShares’ ESG makes life easier for end users. It frames ESG by using the UN Global Compact Principles. Companies that don’t make that cut are excluded from the fund. Examples of offenders would be firms with little regard for carbon emissions, those using child labor, companies lacking independent directors, or firms with no women on their boards.

“Sustainability insights benefit investment decisions by predicting company fundamentals without needing to rely on traditional data sources,” according to BlackRock. “ESG-related data also provides a distinct way to capture how companies, within each sector and industry, are innovating and adapting to thrive as the economy transitions to carbon neutrality.”

FlexShares’ ESG allocates almost 26% of its weight to technology stocks – a familiar sector atop many ESG strategies. Consumer discretionary and healthcare names combine for 27%. Those sector weights are relevant because that trio is among the disruptors that actively initiate and participate in the post-transition economy – something BlackRock highlights as a pillar of ESG investing.

Those sector exposures give the ESG ETF a slight growth feel, as 32.55% of its holdings fit that bill. However, ESG boasts some value credentials; 28.73% of its roster is classified as value fare – a strong number considering the fund’s relatively diminutive exposure to energy and materials stocks.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.