Cheapest ESG ETF Portfolio Gets Cheaper

January 10, 2019

Branching Out: Real Estate, Commodities

For real estate and commodities, neither of which has yet seen the launch of any ETFs purely marketed as "ESG," we once again opted for what we considered the next closest thing.

At least one real estate ETF uses ESG criteria in its selection process, even if it isn't the primary criterion: the U.S. Diversified Real Estate ETF (PPTY), which costs 0.53%.

The fund's provider, Vident, is known for its "principles-based investing" approach, and as part of its methodology, the firm excludes any REIT with "significant governance concerns," as defined by external management and a low free-float percent. These two indicators, argues Vident, tend to lead to a higher risk of conflicts of interest and misalignment of management and shareholders.

Regarding commodities, we opted for one of the many equity-based renewable energy ETFs on the market: the SPDR Kensho Clean Power ETF (XKCP). XKCP, which launched in October and costs 0.45%, undercuts our previous selection, the iShares Global Clean Energy ETF (ICLN), by 0.02%, which carries a 0.47% expense ratio.

XKCP uses a selection process guided by machine-learning to pick companies involved in renewable energy technology, products and services.

Even Cheaper ESG ETF Portfolios

Let's say you don't accept the above fudges for real estate and commodities; we can reroute the 10% of the portfolio that would have gone into these two asset classes into cash instead. As a result, the cost of our all-ESG ETF portfolio would fall to just 0.12%:

 

Cheapest ESG ETF Portfolio (Cash Allocation)
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
Cash 10%        
    Blended Expense Ratio   0.12%  

 

Or if instead we use a classic 60/40 split, with 60% in stocks and 40% in bonds, then the World's Cheapest ESG ETF Portfolio's blended cost falls to 0.13%:

 

Cheapest ESG ETF Portfolio (60/40 version)
Asset Class Weight Fund Ticker Expense Ratio MSCI ESG Score
U.S. Equity 30% Vanguard ESG U.S. Stock ETF ESGV 0.12% 5.48
Developed Markets Equity 20% Xtrackers MSCI EAFE ESG Leaders Equity ETF EASG 0.14% 7.65
Emerging Markets Equity 10% iShares ESG MSCI EM ETF ESGE 0.25% 5.91
Fixed Income 40% iShares ESG U.S. Aggregate Bond ETF EAGG 0.10% N/A
           
    Blended Expense Ratio   0.13%  

Tables sources: ETF.com, FactSet; data as of Jan. 7, 2019

 

Cost Isn't Everything

It's important to remember that the Cheapest ESG ETF Portfolio is one thing and one thing only: cheap. While it's easy to lose yourself in bargain hunting, cost alone tells you nothing about a fund's performance, liquidity, volatility, associated risks and so on.

Furthermore, many of the funds in this portfolio are less than three months old. That means they've yet to accrue much in the way of assets or track record, and they can be illiquid and hard to trade. In fact, only one of the ETFs in our model, ESGE, has yet managed to break the $100 million in AUM liquidity threshold.

Still, despite popular wisdom, inexpensive ESG ETFs do exist, options that are subject to the same fee pressures pushing down costs elsewhere in the ETF market.

Given the additional legwork involved in constructing an ESG ETF, the cost of our World's Cheapest ESG ETF Portfolio may never hit single digits. But all things considered, we think 0.17% is still pretty darn good.

Contact Lara Crigger at [email protected]

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