Cheapest ESG ETF Portfolio Gets Cheaper

January 10, 2019

Last year, we put together the "World's Cheapest ESG ETF Portfolio," a socially responsible twist on former CEO Matt Hougan's regular feature, in which he built a broadly diversified portfolio using the least expensive U.S.-listed ETFs in each of six asset classes (read: "World's Lowest Cost Portfolio Hits 0.05% Fee").

Our Cheapest ESG ETF Portfolio, which cost just 0.21%, wasn't supposed to be an investable guide. Rather, it served as a yardstick to gauge how the fee wars have impacted environmental, social and governance funds, which historically have cost more than conventionally structured ETFs.

However, a lot has changed since we first published that article. Late last year, the ETF leader in the space, BlackRock, lowered prices on a number of its socially responsible ETFs, while Vanguard, the 800 lb. gorilla of ultra-low-cost investing, finally entered the ESG space as well.

As a result, the overall cost of our Cheapest ESG ETF Portfolio has dropped considerably. The model now just costs 0.167%.

Building An ESG ETF Portfolio

To construct the portfolio, we opted for the cheapest ESG ETFs in each of six asset categories, giving no consideration to index, liquidity, assets under management or even trading costs. Expense ratio was our sole guide.

The resultant portfolio provides exposure to more than 2,500 stocks from 35 countries, as well as 178 U.S.-domiciled bonds. What's more, its blended expense ratio of 0.167% costs less than a third of the average equity ETF (0.54%):


Cheapest ESG ETF Portfolio, January 2019  
Asset Class Weight Fund Ticker Expense Ratio MSCI ESG Score
U.S. Equity 40% Vanguard ESG U.S. Stock ETF ESGV 0.12% 5.48
Developed Markets Equity 30% Xtrackers MSCI EAFE ESG Leaders Equity ETF EASG 0.14% 7.65
Emerging Markets Equity 5% iShares ESG MSCI EM ETF ESGE 0.25% 5.91
Fixed Income 15% iShares ESG U.S. Aggregate Bond ETF EAGG 0.10% N/A
REITs 5% U.S. Diversified Real Estate ETF PPTY 0.53% 3.01
Commodities 5% SPDR Kensho Clean Power ETF XKCP 0.45% 5.41
    Blended Expense Ratio   0.17%  


New Kids On The Block

Since last year, there are several new constituents in the portfolio. For starters, the $116 million Vanguard ESG U.S. Stock ETF (ESGV) is now the cheapest ESG-based U.S. equity ETF; with an expense ratio of 0.12%, it costs 0.03% per year less than our previous pick, the iShares ESG MSCI U.S.A. ETF (ESGU).

ESGV, which launched in September, also has a broader selection universe than ESGU. Whereas the BlackRock fund focuses primarily on large- and midcap stocks, ESGV pulls from companies across the size spectrum, quadrupling the number of stocks held.

For developed-market equity exposure, we turned to the $7 million Xtrackers MSCI EAFE ESG Leaders Equity ETF (EASG), a fund that launched last September. Costing just 0.14%, EASG is much less expensive than than our previous selection, the iShares ESG MSCI EAFE ETF (ESGD), which costs 0.20%.

EASG tracks the MSCI EAFE ESG Leaders Index, which applies ESG screens and rankings to the well-known MSCI EAFE Index. EASG has a deeper investment universe than ESGD; however, the top country rankings between the two funds remain largely the same. 

For emerging markets exposure, the $423 million iShares ESG MSCI EM ETF (ESGE), which costs 0.25%, is still the cheapest-in-class. Notably, no new ESG ETFs have launched in this space, which has largely fallen out of favor with investors, especially given the trade-related trouble currently roiling China's markets.

More Green Bond ETFs

The second half of 2018 saw the launch of several new green bond ETFs, both domestic and global. Cheapest among these was the iShares ESG U.S. Aggregate Bond ETF (EAGG), a green-screened version of the Bloomberg Barclays U.S. Aggregate Bond Index (the "Agg"), which costs just 0.10%.

EAGG screens the corporate and government bonds in its mix for ESG factors, such as the issuers' involvement in tobacco, weapons and "severe business controversies." The remaining portfolio is then optimized to maximize its overall average ESG score, while maintaining marketlike exposure.

It's a similar approach to our previous pick for the asset class, the NuShares ESG U.S. Aggregate Bond ETF (NUBD). However, NUBD, at 0.20%, costs twice what EAGG does.

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