Why ESG Investing May Become Problematic With Overlaps and Redundancy

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The bull market is now well over 10 years old, and the major equity indexes recently hit all-time highs. This is a time when investors should be considering how they want their assets and investments to be positioned heading into a potentially economic changing election in 2020. One thematic investment strategy that has continued to grow in assets and in reputation is the so-called ESG investing theme.

ESG includes companies that have high ranks in aspects such as environmental, social and corporate governance. The term has expanded over time for investors and now includes sustainable investing, socially responsible investing and mission-oriented or impact investing strategies all at once. The goal with these funds is to invest in companies that seem to be doing good for society and that have models that can be sustained for decades without doing harm to society or the planet as a whole.

While the ESG investing theme is far from new, it has taken quite some time for it to move outside of certain obvious segments (e.g., solar, genomics, clean tech, environmental) that are far too volatile for many investors to consider. The key exchange-traded funds (ETFs) finally have reached a mass in assets under management that the ESG theme cannot be ignored. There is just one problem though. Many of the top ESG-themed funds range from being very similar to nearly identical in structure.

The MSCI USA ESG Select Index seems to be a key reason for such a strong overlap among top funds. That said, some funds keep ESG in mind with their vision for the future in alternative energy, health care innovation and innovation around manufacturing, financial services and so on. This makes for a rather broad definition and range for what “ESG” really means heading into 2020 and looking beyond. Some of the newest ETFs are the ones that are already among the largest in the field.

24/7 Wall St. has screened the top ESG ETFs to see how each of these differ or are similar. We have referenced the ETFdb.com site and viewed each ETF family’s individual websites in compiling the data. There are some differences in some of the funds, but none of the differences was great enough that it interfered with evaluating the basic criteria.

It turns out that ESG-themed funds have severe overlaps, with Microsoft, Apple, Johnson & Johnson, Alphabet, Visa, Procter & Gamble, Disney and others in their top holdings. These companies are not small enough that the daily inflows or outflows of ESG investing would move their shares, but true ESG investors might have conflicting opinions about the core values of some of the top companies in this strategy.

We have looked at the size of the ETF by assets under management, expense ratios, the number of holdings within each ETF, and we have included the top 15 individual holdings that make up each ETF. Performance metrics as of July 8, 2019, are also shown for a reference against the broader S&P 500 Index gain of 19.4% in 2019 and 10.2% over the trailing 12 months.

BlackRock’s iShares ESG MSCI USA Leaders
> Year-to-date gain: 6.0% (but it’s new)
> Year-over-year gain: N/A

BlackRock’s iShares ESG MSCI USA Leaders ETF (SUSL) is brand new with a May 2019 launch. It already had $1.432 billion in assets under management, and the fund tracks the MSCI USA Extended ESG Leaders Index. It comes with only a 0.10% expense ratio. This ETF holds some 322 stocks, and its top 15 holdings by weighting are:

  • Microsoft (MSFT), 7.55%
  • Johnson & Johnson (JNJ), 2.83%
  • Alphabet (GOOG), 2.69%
  • Alphabet (GOOGL), 2.56%
  • Visa (V), 2.34%
  • Procter & Gamble (PG), 2.14%
  • Walt Disney (DIS), 1.94%
  • Mastercard (MA). 1.88%
  • Verizon Communications (VZ), 1.82%
  • Home Depot (HD), 1.80%
  • Merck (MRK), 1.67%
  • Intel (INTC), 1.63%
  • Coca-Cola (KO), 1.60%
  • PepsiCo (PEP), 1.41%
  • Netflix (NFLX), 1.26%

Xtrackers MSCI USA ESG Leaders Equity
> Year-to-date gain: 8.0% (also new)
> Year-over-year gain: N/A

The Xtrackers MSCI USA ESG Leaders Equity ETF (USSG) launched only in March of 2019, and it already has $1.209 billion in assets under management and tracks the MSCI USA ESG Leaders Index. It has only a 0.10% expense ratio, and its top 15 holdings of 321 total holdings are:

  • Microsoft (MSFT), 7.58%
  • Johnson & Johnson (JNJ), 2.84%
  • Alphabet (GOOG), 2.69%
  • Alphabet (GOOGL), 2.61%
  • Visa (V), 2.35%
  • Procter & Gamble (PG), 2.15%
  • Disney (DIS), 1.95%
  • Mastercard (MA), 1.90%
  • Verizon (VZ), 1.83%
  • Home Depot (HD), 1.81%
  • Merck (MRK), 1.68%
  • Intel (INTC), 1.64%
  • Coca-Cola (KO), 1.61%
  • PepsiCo (PEP), 1.42%
  • Netflix (NFLX), 1.27%