ESG ETFs Dominate Week

December 19, 2019

With relatively quiet times in the ETF industry during the lead-up to the holidays, this week was notable for the three ESG launches that took place. PIMCO and IndexIQ both rolled out socially responsible ETFs.

PIMCO

Today PIMCO debuted the PIMCO RAFI ESG U.S. ETF (RAFE), which is the first ESG ETF to be based on a Research Affiliates index. The fund has an expense ratio of 0.29% and lists on the NYSE Arca.

RAFE’s underlying index combines the Research Affiliates fundamental investment approach with an ESG overlay. The four fundamental metrics that drive the RAFI methodology are sales, cash flow, dividends plus buybacks and book value.

The ESG element of the methodology screens out companies with significant operations around tobacco, gaming, weapons and fossil fuels, and also overweights companies with strong ESG scores, according to the prospectus.

The methodology in this case goes beyond just the three ESG categories of evaluation to include diversity and financial discipline based on data provided by socially responsible ratings provider Vigeo Eiris.

Companies included in the index are weighted by their fundamental scores, which are then adjusted by their ESG scores. Components are rebalanced on a quarterly basis, with one quarter of the index rebalanced on each rebalancing date, the document says. At the end of September, RAFE’s underlying index included 261 components.

Just last week, PIMCO also rolled out an actively managed short-term debt ETF that incorporates ESG criteria into its investment approach.

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