Are ESG-themed ETFs not as hot as they seem?

A dissecting analysis of inflows into socially responsible investing hints at a less radical shift in portfolios

Are ESG-themed ETFs not as hot as they seem?

Given the clamour for investments that align with specific values, meet specific sustainability requirements, or seek positive social impacts, one could assume that the ones with the most intense convictions would enjoy sizeable inflows. But an examination of ESG ETFs suggests that the investors behind the green revolution aren’t so radical.

“Year to date, investors have poured US$4.7 billion into socially responsible ETFs, also known as environmental, social and governance (ESG) ETFs [in the US],” reported Lara Crigger of That contrasts with inflows last year, when investors injected just US$2.6 billion into such funds.

The lion’s share of this year’s flows reportedly went to the iShares ESG MSCI USA Leaders ETF (SUSL) and the Xtrackers MSCI U.S.A. ESG Leaders Equity ETF (USSG), which have respectively taken in US$1.4 billion and US$1.2 billion so far this year. Strong flows also went to Vanguard ESG ETFs as well as numerous iShares ESG funds meant to replace or supplement key core asset allocations.

“The common theme between the top flows gatherers is that they are all broad-based, core ETFs designed to supplement or replace vanilla exposure in an asset allocation plan,” Crigger noted.

She cited the iShares ESG MSCI EAFE ETF (ESGD) and the iShares ESG MSCI EM ETF (ESGE), which have collectively taken in US$539 million this year, track virtually the same exposures as the iShares MSCI EAFE ETF (EFA) and the iShares MSCI Emerging Markets Index (EEM), respectively. The only difference: the ESG ETFs have several exclusionary screens that eliminate securities rated as the worst ESG offenders.

Among the 10 top-drawing ESG ETFs this year, only one had an expense ratio above 0.3%; the five with the largest year-to-date flows are reportedly priced at or below 0.2%. The dominance of low-cost core products among ESG ETFs challenges many notions that narrow, thematic funds designed to ride the next “green” fad are the dominant products.

Here’s some more ammunition to blow out that argument: the kinds of flows engendered by most thematic ESG ETFs are nowhere near what their broad-core brethren have attracted.

The highest-netting thematic ETF, the Global X S&P 500 Catholic Values ETF (CATH), has taken in US$86 million year-to-date. Most other thematic ESG ETFs, however, have seen zero to negative flows so far in 2019. Those include the SPDR SSGA Gender Diversity Index ETF (SHE), the iShares MSCI ACWI Low Carbon Target ETF (CRBN), and the Goldman Sachs JUST U.S. Large Cap Equity ETF (JUST); they’ve lost US$73 million, US$88 million and US$96 million, respectively.

“Interestingly, although most of the ETFs that have bled investment assets have all been higher cost, SHE, CRBN and JUST all carry expense ratios of just 0.20%,” Crigger wrote.

“Flows data suggests that ETF investors are approaching socially responsible investing not as a thematic play but as an investment lifestyle, hoping to convert some or all of their existing asset allocations to more ethically acceptable alternatives without sacrificing market performance,” she added.


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