BlackRock To Launch Gun-Free ESG ETFs

April 06, 2018

In a note to investors released April 5, BlackRock announced sweeping changes regarding the presence of gun stocks in its ETF lineup.

These include the impending launch of two new gun-free ETFs and the implementation of explicit screens for civilian firearms manufacturers and retailers in its existing bond and equity ESG ETFs.

BlackRock will also slash fees for its two most popular ESG funds, which also happen to be the largest ESG ETFs on the market: the iShares MSCI KLD 400 Social ETF (DSI) and the iShares MSCI USA ESG Select ETF (SUSA).

Surging Demand For Gun-Free Investments

With yesterday's announcement, BlackRock appears to be making good on its word to offer more gun-free investment choices to its investors.

In a March 2 note to investors, BlackRock hinted that gun-free ETF investments were on the way, while at the same time declaring its intentions to engage with gun manufacturers and retailers to improve their safety standards and business practices.

This all comes in the wake of the Feb. 14 shooting at Marjory Stoneman Douglas High School in Parkland, Florida, in which 17 students and teachers were killed by a former student with an AR-15 assault rifle.

The mass shooting has galvanized gun reform activists in a way few such incidents have before, sparking protests, school walkouts and even the nationwide March For Our Lives on March 24. Several retailers, such as Dick's Sporting Goods and Walmart, have already announced they would raise the age of customers to whom they would sell rifles, from 18 to 21, as well as discontinue the sale of some assault weapons.

Many investors have likewise voted with their wallets, so to speak. Since Feb. 14, investors have poured $190 million into gun-free ESG ETFs, or roughly 46% of all new net inflows into the space (read: "ETFs Pressured To Drop Gun Stocks").

New Gun-Free Small-Cap Fund

In yesterday's note, BlackRock announced it would soon launch a new small-cap ESG ETF, the iShares MSCI USA Small-Cap ESG Optimized ETF (ESML).

ESML, which will launch on or around April 12, will track the MSCI USA Small Cap Extended ESG Focus Index, a benchmark designed to offer exposure to small-cap companies that possess favorable ESG characteristics. It will also explicitly screen out all civilian firearm manufacturers and large gun retailers. (Read the filing here.)

By implementing this gun-free screen, ESML will avoid exposure to the three largest and best-known public civilian firearms manufacturers—Sturm, Ruger & Co., American Outdoor Brands Corp and Vista Outdoor Inc.—all of which are small-cap stocks.

These three companies currently appear in 47 ETFs, including at least one ESG ETF, the Inspire Small/Mid Cap Impact ETF (ISMD) (read: "Clients Asking For Gun-Free ETFs"). The only other small-cap ESG ETF, the NuShares ESG Small-Cap ETF (NUSC), has no gun stocks in its portfolio.

Intriguingly, ESML will also carry an expense ratio of 0.17%, making it the third-cheapest fund in the ESG sector. Only two other iShares products, the iShares MSCI USA ESG Optimized ETF (ESGU) and the iShares ESG 1-5 Year USD Corporate Bond ETF (SUSB), carry a lower fee.

 

New Gun-Free Bond ETF

BlackRock has also filed for a new fixed-income ETF based on a Bloomberg Barclays index that will select bonds based on the MSCI ESG ratings of their issuing companies.

The iShares ESG US Aggregate Bond ETF, for which there is no ticker or expense ratio yet named, would also explicitly exclude bonds from all civilian firearms makers and large gun retailers.

The ETF's benchmark would track investment-grade bonds, including Treasuries, government-related bonds, corporate bonds, mortgage-backed securities and more. Its goal is to provide risk and returns similar to that of the Bloomberg Barclays US Aggregate Bond Index, a popular U.S. fixed-income benchmark, while using only ESG-friendly issues.

That makes it essentially a gun-free version of the iShares Core U.S. Aggregate Bond ETF (AGG), which has no positions in bonds from Sturm, Ruger & Co., American Outdoor Brands Corp. or Vista Outdoor Inc.

Subject to approval, the new bond ETF would launch later this year.

Fees For DSI, SUSA Slashed

At the same time, BlackRock is also halving expenses for its best-known ESG ETFs, DSI and SUSA, bringing their net expenses down to just 0.25%. The lower operating expense, which is effective immediately, is achieved through a fee waiver that will remain in place until April 5, 2020.

The lower fees would position them well below the average expense ratio for all ESG ETFs, which is 0.46%.

DSI and SUSA are the two largest ESG ETFs, with $993 million and $661 million in assets under management, respectively.

Lately they've also been a popular choice for investors looking to go gun-free: In the seven weeks since the Feb. 14 mass shooting, DSI alone has taken in $50 million in new net inflows, the most of any ESG ETF. SUSA, meanwhile, has pulled in $17 million.

New Civilian Firearm Screens

Finally, BlackRock is also changing the underlying indexes for all its existing ESG ETFs to include explicit screens for civilian firearms manufacturers and retailers.

Affected products include SUSA, SUSB and ESGU, as well as the iShares ESG USD Corporate Bond ETF (SUSC), the iShares MSCI EAFE ESG Optimized ETF (ESGD) and the iShares MSCI EM ESG Optimized ETF (ESGE).

These funds already screen out makers of controversial weaponry, such as bioweapons or landmines. However, the ETFs will now also explicitly screen out all makers of civilian firearms, as well as any retailer that earns either $20 million in revenue or 5% or more of their total revenue from civilian firearms or related products.

Gun-Free 401(k)s

Though it is not an ETF-specific move, BlackRock will also offer a new line of gun-free products specifically for institutional investors, including U.S. pension plans such as 401(k) plans.

"BlackRock manages money for a diverse set of investors, including pension plans, insurers and individual investors, who have a wide range of views on firearms," said BlackRock about the moves in the statement. "It is ultimately our clients’ choice about the types of funds they invest in."

Contact Lara Crigger at [email protected]

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