Investing

The Best ESG ETFs in 2022

NAACP Minority Empowerment ETF

Focus on Minority Empowerment

NAACP Minority Empowerment ETF is one of a kind: the only ESG fund we could locate specifically dedicated to investment in firms that empower minority Americans.

The fund tracks the Morningstar Minority Empowerment Index, which focuses on companies with effective racial and ethnic diversity policies. The fund selects large and mid-cap US companies across a spectrum of industries. The fund’s website does not mention other ESG screens, so it is not clear whether companies comply with other ESG criteria.

The fund provider, Impact Shares, is a 501(c)(3) nonprofit organization. All profits derived from management fees are donated to the NAACP, providing an additional boost to minority interests.

The screening process allows considerable diversity across economic sectors, though there is a strong weighting toward technology.

  • Technology: 28.86%
  • Healthcare: 13.51%
  • Consumer Cyclical: 13.04%
  • Financial Services: 11.01%
  • Industrials: 6.95%

The balance of the fund’s holdings is spread across several sectors with weightings under 5%, including Basic Materials, Consumer Defensive, Energy, Real Estate, and Utilities. These are the fund’s top five holdings:

Company Percentage of Net Assets
Apple Inc. 5.3
Microsoft Corp. 4.78
Amazon.com Inc. 4.53
Tesla Inc. 3.63
Nvidia Corp. 2.91

The fund’s emphasis on large tech companies is very visible in that list. Essentially this is a tech-weighted US large-cap/mid-cap selection with a specific ESG component. It’s not clear whether other ESG screens are applied.

The expense ratio is 0.49%, on the high side for this list but (again) quite moderate for a targeted ESG ETF. As an added bonus, profits from management fees are donated to the NAACP.

This is one of the best ESG ETFs for investors who are concerned with minority rights and who want a solid, conservative, diversified US-dominated fund.

How We Ranked the Best ESG ETFs

We looked at several criteria while ranking these funds, which are explained in greater detail below. It’s important to note that to some extent these will vary with the type of fund you are looking for. A fund specialized in a particular ESG sector will have a higher expense ratio and less diversification than a fund with a broader focus.

A low score in any of these areas is not necessarily a bad thing. It’s just a factor to consider and to weigh against other similar funds. If you want a fund focused on clean energy you’ll have less opportunity for diversification than you would with a fund spanning the full range of ESG concerns.

Note: We did not try to rank these funds according to any ESG-specific criteria. Different investors have different levels of desired screening, so we can’t say any level of screening is “better”. The key here is to look for funds that match your personal goals.

We also looked at fairly prominent funds involved in multiple markets with substantial assets under management. If you are looking for funds meeting very specific ESG criteria it may be worth your while to look at smaller boutique funds, but you’ll have to settle for higher management fees and lower levels of liquidity.

Expense Ratio

The expense ratio is the total of all fees paid by an investor in an ETF. An expense ratio of 1 means you pay 1% of the value of your investment every year as a management fee, whether the fund gains or loses in value.

Broad funds that closely track an index usually have lower management fees than targeted ETFs that seek specific investment criteria. We looked for the lowest fees we could find in each type of ETF.

Returns

We looked at the average annual return of the fund over a 3-year period. Please note that the last 3 years have been dominated by a bull market, and these returns may not be duplicated in any future period. For reference, the average annual return for an S&P 500 index ETF has been 18.52% over the last three years.

Most of the funds in this list show returns close to or above that level.

Number of Holdings

The number of stocks an ETF holds is an indication of its diversification. This figure will be higher in very general funds and lower in very specific funds. If you’re looking for exposure in a certain sector you won’t be concerned with diversification, so you will be less concerned with this indicator.

Assets Under Management and Shares Outstanding

These indicators describe the size of the fund. A fund with high figures in these categories will be highly liquid: there will be a lot of trading action so if you want to sell you are more likely to be able to find a buyer who is willing to pay what you want to sell for.

Less liquid funds may have a wider spread between the bid and the ask for the shares. If an ETF is very small and specialized with little trading you may have a harder time selling your shares. Some investors may be willing to take this risk to have a fund that precisely matches their ESG criteria, but it is always a factor to consider in your evaluation.

Originally published at ValueWalk.

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