Your Stealth 'ESG' Portfolio

July 10, 2019

Here there are a few ways the data is telling you similar things. The “BBB” rating puts it firmly in average territory:

 

 

And in case you weren’t clear, the 59% percentile rank in its peer group, 54% among all funds, and 5.54 out of 10 on “quality” all point you to basically the same conclusion.

So what do you do with this information? Well, if you wanted to maintain your large cap exposure to the U.S. market, you could just go back to the ETF finder and look just at those funds, sorting based on the ESG score again:

 

4_LargeCapLeaders

(For a larger view, click on the image above)

 

And to me, what you find here is super interesting.

The winners in this segment aren’t ESG-centric funds. They are, well, the boring ones. For these ETFs tackling the U.S. market through the lens of long-term dividend growth or minimum volatility, their portfolios are actually quite diverse: Low-vol funds are currently loaded up on utilities and financials; dividend-focused funds tend to be overweight in industrials and consumer stocks.

Adding ESG To Your Due Diligence

The point here (and I do have one) is that you don’t have to jump into ESG investing with both feet to include it in your portfolio construction process. Sure, if how the companies you own treat people and the planet is your primary concern, by all means, have at it. There’s a whole micro-industry of ESG-branded ETFs at your fingertips.

But I suspect, for most investors, those concerns are just a part of a much more comprehensive process that includes everything from expenses to exposures.

So if you’re interested in ESG but unclear how to include it in your or your clients’ portfolios, consider just starting by measuring what you already own. You might be surprised to find that a few simple tweaks can make a big difference.

P.S. MSCI published a great piece conducting an analysis of the international ETF universe that’s worth a read too, here: Under The Hood: Rating ESG Funds.

For more information, see Introducing MSCI ESG Fund Ratings.

Dave Nadig can be reached at [email protected]

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