ESG ETFs Can Be a Core Portfolio Component | ETF Trends

The socially responsible investing is beginning to gather momentum through ETFs, like those that track environmental, social and governance principles, as more investors begin to understand that this theme is more than a gimmick and can provide diversified, systematic core market exposure.

For example, something like the recently launched Xtrackers S&P 500 ESG ETF (SNPE) is among the first ETFs to track the S&P 500 ESG Index, the environmental, social and governance (ESG) derivative of the widely followed S&P 500 Index.

“Momentum continues to build around SNPE and our other ESG products. With sub 1% tracking error to the S&P 500 and at a core price, SNPE is attracting assets from competitors. Not just ESG competitors, but low cost, large cap domestic allocations. This isn’t thematic, this a core holding,” Luke Oliver, DWS Managing Director, Head of Index Investing, Americas, told ETF Trends.

Reflecting investors’ desire to embrace ESG investments, SNPE already has about $98 million in assets under management, an impressive amount for a fund that’s just over four months old and enough to make SNPE one of this year’s most successful new ETFs.

SNPE’s underlying index seeks to target 75% of the float market capitalization of each Global Industry Classification Standard Industry Group within the S&P 500 Index, using an ESG score as the defining characteristic.

Specifically, the underlying index screens out companies that are involved in the production or sales of tobacco, engaged in the business of controversial weapons, fall within the bottom 5% of the United Nations Global Compact score ranking, or fall within the lowest 25% of ESG scores from each GICS Industry Group.

The United Nations Global Compact score ranking implements quantitative models and data to rate a company based on the normative principles of the United Nations Global Compact, including human rights, labor rights, the environment, and anti-corruption.

After excluding such companies, the underlying index selects from the remaining companies in the S&P 500 based on decreasing order of ESG Score until 65% of the universe float-adjusted market capitalization is reached; existing companies ranked between 65% and 85% are selected to get as close as possible to the target 75% of float-adjusted market capitalization; and if the 75% target is not met, companies not already selected may be added in decreasing order of ESG scores.

For more information on the ESG theme, visit our socially responsible ETFs category.