A Deeper Dive Into ESG ETF Portfolios

August 31, 2017

A few things to note here: First, Betterment’s vanilla portfolio—which they kindly provided me at a similar 70% equity allocation to Matt Hougan’s—makes a few different choices than Matt. It’s still hunting for cheap, but it’s clearly also looking for liquidity.

When Betterment chooses an ETF, it ends up steering hundreds of millions of dollars around. When Matt chooses an ETF, it happens in an academic vacuum where trading is free and market impact is irrelevant. While funds like the Schwab International Equity ETF (SCHF) are plenty liquid for any individual investor, the Vanguard funds here are almost 10 times as liquid, or more.

Second, both of these portfolios include muni bonds, which, like commodities, aren’t rated by the MSCI ESG methodology, so I’ve pulled them from the calculations.

The Big Difference

So what’s the conclusion here? Surprisingly, the major difference between these two portfolios—and indeed between the SRI portfolio and Matt’s—is simply the inclusion of the iShares MSCI KLD 400 Social ETF (DSI) in place of a big chunk of the U.S. equity exposure. On the surface, this has a huge impact on expenses—nearly doubling the overall portfolio expense—and not much impact on the weighted average score, which goes up from 5.4 to 5.74.

But here’s where I think it pays to look under the hood. If you really care about owning companies that are doing good—and avoiding those doing, well, bad—then this SRI spin makes a difference. The percentage of “good” companies goes up by 2%, and the percentage of “bad” companies drops by more than 4%. It’s up to you whether you think that matters, but it’s not insignificant, and belies the raw score a bit.

Can You Do Better?

Since Betterment is making a bit of a big deal over its SRI alternative, I thought it might be worth looking at its biggest competitor, Wealthfront. Here’s a sample portfolio I was able to extract that gets pretty close in terms of overall exposure weights to both Matt’s and Betterment’s vanilla portfolios.



Exposure Allocation Ticker Name Expense
Ratio %
U.S. Equity 33% VTI Vanguard Total Stock Market ETF 4 4.9053 6.26 10.64 5.18
Intl. Equity 15% VEA Vanguard FTSE Developed Markets ETF 7 6.2129 5.83 10.40 6.46
Emerging Markets 12% VWO Vanguard FTSE Emerging Markets ETF 14 4.352 2.69 3.07 3.39
Dividends 6% VIG Vanguard Dividend Appreciation ETF 8 5.617 4.98 15.26 6.07
Natural Resources 5% XLE Energy Select Sector SPDR Fund 14 4.128 0.10 2.03 5.62
Municipal Bonds 29% VTEB Vanguard Tax-Exempt Bond ETF 9       N/A
        7.84 5.09 5.02 9.09  



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