The asset management industry, in typical nimble fashion, continues to zero in on the growing demand by investors for funds that target sustainable investing objectives.
This week alone, BlackRock, Vanguard and Transamerica launched funds promising targeted exposure to environmental, social and governance objectives. Vanguard and Transamerica also launched fixed-income products designed to help advisers fill gaps in diverse ESG lineups.
BlackRock, which has been among the most vocal asset managers when it comes to sustainable causes, will test the strength of the category with three index funds that apply ESG screens to popular broad market exposure.
Todd Rosenbluth, director of mutual fund and ETF research at CFRA, acknowledged BlackRock’s savvy move to tap into a hungry ESG-investor market with low-cost index funds, but warned that investors should be aware of what they’re getting with the new passive funds.
“They’re more expensive than traditional non-ESG funds, but they’re still extremely cheap and should appeal to advisers looking for low cost ESG products,” he said.
By applying ESG screens, the new funds alter the composition of the traditional indexes, which should be expected to show up on the performance measurements.
The iShares ESG Screened S&P 500 ETF (XVV), for example, is the sustainable version of the iShares Core S&P 500 ETF (IVV). The primary differences between the two index funds are that IVV charges 3 basis points, while XVV charges 8 basis points, and IVV includes exposure to 505 stocks, while XVV is made up of 452 stocks.
No companies were added to the ESG version, but companies such as Exxon and Chevron were among the most prominent names removed from the original non-ESG index.
It is a similar story for the iShares ESG Screened S&P Mid-Cap ETF (XJH) and the iShares ESG Screened S&P Small-Cap ETF (SJR). The new BlackRock funds, which track a sustainable version of the S&P indices, come on the heels of two other broad market ETFs that aim to offer an ESG tilt.
Xtrackers S&P 500 ESG ETF (SNPE) was launched in June 2019 to track a version of the S&P that targets ESG mandates but doesn’t mirror the sustainable version followed by the BlackRock ETF.
For instance, Berkshire Hathaway, the seventh-largest stock in the S&P 500, is included in the XVV ETF, but is not part of SNPE. Netflix and Disney are also included in XVV, but not in SNPE, for reasons Rosenbluth believes are related to corporate governance issues flagged by the SNPE index.
It’s also worth noting the SNPE index, even though it includes “500” in its name, holds just 299 stocks.
In terms of performance, SNPE’s more concentrated portfolio has proven a winner in 2020 with a 3.47% gain, compared to a 1.66% gain from the traditional IVV version of the S&P 500. The SPDR S&P 500 ESG ETF (EFIV), launched in July, tracks the same ESG index as SNPE.
Both SNPE and EFIV charge 10 basis points. With relatively short histories, SNPE has grown to $256 million, while EFIV has grown to $48 million.