ESG ETF Strategies Are Beginning to Turn Heads | ETF Trends

More investors are looking into socially responsible investment strategies like ETFs that incorporate environmental, social and governance principles.

In 2019, the ETF industry saw record assets inflows into strategies that provide exposure to stocks based on ESG considerations, revealing a growing desire to add sustainability considerations to a diversified investment portfolio, according to an FTSE Russell note.

The greater attention also came in a timely fashion as ESG indices outperformed in 2019. For example, the FTSE US All Cap Choice Index, part of the FTSE Global Choice Index Series, rose 33.5% for the year, compared to a 31.3% return for the FTSE USA All Cap Index on which it is based. Additionally, the FTSE Global All Cap ex US Choice Index returned 23.9%, compared to the FTSE Global All Cap Index’s 22.2% gain.

“The FTSE Global Choice Index Series can be an efficient way for investors to begin adding a sustainability screen to a broad investment portfolio,” Tony Campos – director, ESG Americas, FTSE Russell, said in a note. “The indexes measure the impact of a company’s products and its conduct, excluding companies that manufacture vice products or weapons and screening for conduct issues such as corruption or environmental scandals.”

ETF investors could have also gained exposure to these two indices through the Vanguard ESG U.S. Stock ETF (NYSEArca: ESGV) and the Vanguard ESG International Stock ETF (NYSEArca: VSGX). The ESG ETFs’ underlying indices exclude companies producing adult entertainment, alcohol and tobacco products, conventional and controversial weapons (including civilian firearms), fossil fuels, gambling activities, and nuclear power. The indices also exclude companies that do not meet certain diversity criteria, as well as the labor, human rights, anti-corruption, and environmental standards defined by the Ten Principles of the United Nations Global Compact.

“ESG and sustainable investment strategies are an increasing focus for many of our investors,” Rich Powers, head of ETF product management, The Vanguard Group, said in a note. “ETFs tracking rules-based, broad market indexes screened for ESG criteria can serve as core portfolio building blocks for investors seeking to integrate ESG into their long-term investment strategies.”

For more information on ESG-related strategies, visit our socially responsible ETFs category.