On Thursday, the two largest ETF issuers, BlackRock and Vanguard, further built out their environmental, social and governance (ESG) fund families with several launches, including three from BlackRock and one from Vanguard.
The four new funds include:
- iShares ESG Screened S&P 500 ETF (XVV)
- iShares ESG Screened S&P Mid-Cap ETF (XJH)
- iShares ESG Screened S&P Small-Cap ETF (XJR)
- Vanguard ESG U.S. Corporate Bond ETF (VCEB)
All four ETFs will list on the Cboe Exchange, which is the parent company of ETF.com.
Screened Vs. Aware Vs. Advanced
The three iShares funds represent different capitalization slices of U.S. equity exposure, under the issuer's "ESG Screened" branding. That in itself is notable, as the vast majority of iShares's sustainable U.S. equity ETF lineup has been total market or large cap/midcap blend funds. XVV is a pure large cap ETF, while XJH focuses on midcaps and XJR focuses on small caps.
XVV, XJH and XJR also represent the first use of S&P Dow Jones Indexes in iShares's broad-based, market-mirroring ESG lineup (though the highly thematic, $1.4 billion iShares Global Clean Energy ETF (ICLN) also uses an S&P index).
SPDJI is a division of S&P Global, which also provides ESG ratings and analysis. Until this point, iShares had only implemented MSCI rankings and indexes in its sustainable products.
"ESG Screened" is the latest entry into BlackRock's increasingly diverse spectrum of ESG product offerings. What started off as a single exclusionary approach has been distilled into both market replication and thematic offerings. (Read: "BlackRock Raises Stakes For ESG ETFs.")
Within the market replication bucket, there are "Aware" products, that seek similar maximized ESG scores, screen out some controversial companies, and maintain low tracking error to target benchmarks; and "Advanced" products, that use more extensive, stringent screens and exclude companies with the worst ESG scores (BBB and below).
These "ESG Screened" ETFs appear to fall somewhere in the middle of the spectrum.
How The ‘Screened’ Benchmarks Are Built
To build the benchmarks for these funds, the indexers start with the relevant vanilla, market-cap-weighted S&P benchmark: For XVV, it's the S&P 500; for XJH, it's the S&P Midcap 400; and for XJR, it's the S&P SmallCap 600.
Then the indexers screen out companies over a certain threshold level of involvement in tobacco, controversial weapons, the manufacture/retail of small arms, and fossil fuel activities, as well as companies holding reserves of coal, oil, natural gas and shale. Companies deemed out of compliance with the United Nations' Global Compact are also excluded from eligibility.
In addition to these screens, constituents are also regularly evaluated for governance controversies, such as economic crime, corruption, fraud, illegal commercial practices, human rights abuses, labor disputes, workplace safety, catastrophic accidents and environmental disasters. Should a company be flagged on one or more of these issues, they may be removed from the index, then remain ineligible for inclusion for up to one year.
Vanguard No Slouch
Although BlackRock is by far the dominant issuer among ESG ETFs, with 26 ETFs totaling some $27 billion in assets under management, Vanguard is hardly a slouch.
Though the firm only has two ETFs, the Vanguard ESG U.S. Stock ETF (ESGV) and the Vanguard ESG International Stock ETF (VSGX), those two ETFs have attracted more than $3 billion in assets between them. ESGV now has $1.9 billion in assets under management, while VSGX is up to $1.2 billion.
VCEB represents the first new Vanguard ETF since those products debuted just over two years ago. It's also the issuer's first ESG bond ETF.
VCEB Makes Active Diversity Push
The fund tracks the Bloomberg Barclays MSCI U.S. Corporate SRI Select Index, a subset of the Bloomberg Barclays U.S. Corporate Index upon which its vanilla Vanguard Total Corporate Bond ETF (VTC) is based.
VCEB, which tracks U.S. investment grade corporate bonds with over a year left to their maturity dates, screens its issuers along various ESG criteria.
Excluded from the index are bonds of companies with a certain amount of revenue derived from or certain business lines related to 13 different controversial industries. These include the usual suspects—alcohol/tobacco, nuclear, adult entertainment, controversial weaponry—as well as newer hot-button industries, such as civilian firearms and fossil fuel companies, like thermal coal, oil and gas. (Read: "Dirtiest & Cleanest ESG Funds.")
Like the BlackRock funds, VCEB also excludes bonds of companies on the basis of ESG controversies, including their environmental impact, labor and human rights issues, community impact, governance issues and noncompliance with the UN Global Compact.
Intriguingly, VCEB's index also excludes the bonds of companies with no women on their boards, or that do not provide data on their board demographics—a decision that potentially could exclude a significant number of issues from companies who cannot or will not provide this data for ratings agencies.
New Frontiers In Fee Cutting
XVV will cost 0.08%, making it the cheapest of BlackRock's ESG lineup, while XJH and XJR will cost 0.12%. But that too represents a price break: BlackRock's other ESG small cap fund, the $374 million iShares ESG Aware MSCI USA Small-Cap ETF (ESML), costs 0.17%. (No similar comparison can be made for XJH, however, as it is the first of iShares' ESG ETFs to focus solely on midcaps.)
Meanwhile, VCEB will cost 0.12%, making it the cheapest total corporate bond ETF in the ESG space; the iShares ESG Aware 1-5 Year USD Corporate Bond ETF (SUSB), which also costs 0.12%, tracks a much narrower range of short-term bonds.
That said, these new ETFs' prices are still higher than those of their vanilla, non-ESG counterparts. In comparison, the iShares S&P 500 ETF (IVV), the iShares Core S&P Mid-Cap ETF (IJH), and the iShares Core S&P Small-Cap ETF (IJR) cost 0.03%, 0.05% and 0.06%, respectively. Meanwhile, VTC costs 0.05%, or 7 basis points less than VCEB.
Still, the smaller price tags for these new ESG ETFs reflect not just the continued race to the bottom in ETF pricing as seen across the industry, but also the sheer scale and distribution power that BlackRock and Vanguard have at their disposal. Even for ESG ETFs, issuers this big can afford to slash their prices in ways that smaller issuers cannot.
Contact Lara Crigger at [email protected]