iShares Broadens Sustainable ETF Offering

June 18, 2020

With six iShares ETFs making their debuts today, the world’s largest issuer has staked a major claim in the environmental, social and governance space. The firm already has a wide lineup of ETFs with methodologies focused on sustainability and ESG, including 11 targeting broad asset classes. However, today sees the introduction of what will become two new ESG-focused ETF families, a significant expansion of iShares' ESG offering. 

Today’s launches include four ETFs that are modeled after iShares’ existing family of asset allocation ETFs, but with a socially responsible twist. The ESG asset allocation ETFs are the first of their kind and encompass four funds ranging from conservative to aggressive allocations. They include the following:

Meanwhile, the “ESG Advanced” family kicked off with the rollout of the iShares ESG Advanced MSCI USA ETF (USXF) and the iShares ESG Advanced MSCI EAFE ETF (DMXF), with an emerging markets ETF and a fixed income ETF slated to launch later this year. The methodology driving the group of funds essentially takes the ESG requirements up a notch, only including companies with higher scores in the indexes and adding even more screens for controversial business activities.

Carolyn Weinberg, managing director and global head of product for iShares, notes increased demand for ESG solutions, pointing out that ESG ETFs have pulled in roughly $25 billion in assets year-to-date in 2020, and that’s after 2019, a year widely considered an inflection point for ESG investing in general.

“What we have seen is that clients are turning to ESG, not only for values—which is the original reason people were turning to ESG—but now for performance, risk management and portfolio construction. There has been a clear acceptance that ESG, or sustainable criteria, is consequential for returns,” she said.

The four asset allocation ETFs each have an expense ratio of 0.18% and list on Cboe Global Markets, the parent company of ETF.com. USXF and DMXF come with expense ratios of 0.10% and 0.12%, respectively, and both list on the Nasdaq exchange.

ESG Aware Asset Allocation Family
The ESG Aware asset allocation ETFs invest in five other iShares ETFs to varying degrees. Those funds include the iShares ESG MSCI USA ETF (ESGU), the iShares ESG MSCI USA Small-Cap ETF (ESML), the iShares ESG MSCI EAFE ETF (ESGD), the iShares ESG MSCI EM ETF (ESGE) and the iShares ESG U.S. Aggregate Bond ETF (EAGG).

The more conservative the ETF, the greater its weighting to EAGG and the lower its weighting to the equity-focused ETFs. Thus, EAOK’s index has a nearly 70% weighting in EAGG, while EAOA’s index has a weighting in EAGG of less than 20%. Similarly, the more aggressive the ETF, the greater its index weighting in equities, such that EAOK’s index weighting in ESGU is under 18% while EAOA’s index has a weighting in the same ETF of more than 45%.

Interestingly, iShares’ conventional asset allocation ETFs have expense ratios of 0.25%, seven basis points more than what the ESG Aware family charges.

“We want to make it very easy and very inexpensive to get an all-in-one ticker, where you can just buy an entire portfolio that matches your ESG objectives and your risk/return objectives,” Weinberg said, noting that the ESG asset allocation ETFs could be useful for individual investors with ESG objectives but also for advisors looking to provide ESG solutions to their clients.

ESG Advanced
The ESG Advanced lineup is basically an even purer version of iShares’ lineup of broad-based ESG ETFs, with an intensified focus on ESG. While the broad-based ETFs have very limited screens and look to keep sector exposures in line with those of the parent indexes, the ESG Advanced lineup is more focused on the socially responsible aspect of investing. As with other iShares ESG ETFs, the methodology scores individual securities relative to their sector peers.

The funds only select the top-rated tiers of securities in terms of ESG scores and have far more screens than just eliminating companies involved in tobacco, weapons and fossil fuels. The ESG Advanced family screens out companies involved in those areas, but also adult entertainment, alcohol, gambling, genetic engineering, palm oil, private prisons, predatory lending and nuclear power, as well as companies facing severe business controversies, according to the prospectus.

Weinberg notes that the strategy for the ESG Advanced lineup is designed for investors who are less concerned about their portfolio resembling broad benchmarks and more focused on their ESG goals, describing it as a “best in class” approach to sustainable investing. The launch of the two new families is part of a broad push by iShares to democratize ESG investing and offer investors more choices so they can tailor their ESG exposures to fit their needs and goals, she says. 

Contact Heather Bell at [email protected]

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