Institutional Money Comes To ESG ETFs

March 13, 2019

Over the past two weeks, more than $1 billion in institutional money has poured into socially responsible ETFs, leading many to wonder whether environmental, social and governance (ESG) investing has finally "hit it big."

Last week, the Xtrackers MSCI U.S.A. ESG Leaders Equity ETF (USSG) had the biggest launch of any ETF in the past 15 years, debuting with an infusion of $843 million from the Finnish insurer, Ilmarinen (read: "ESG ETF's Launch Biggest In 15 Years").

Earlier this month, Vanguard's two ESG ETFs also saw significant inflows. On March 1, the Vanguard ESG U.S. Stock ETF (ESGV) took in $100 million, while on March 4, the Vanguard ESG International Stock ETF (VSGX) took in $104 million.

In the grand scheme of things, $1 billion in inflows—even in a single month—isn't that much in the ETF industry, where total assets invested now top $3.7 trillion.

However, as of the end of last year, ESG ETFs had only $8 billion in total assets under management (AUM)—meaning that $1 billion represents a heck of a hefty infusion of new cash (read: "The Year In ESG ETFs").

Institutional Interest In LRGE, ESGD

Year-to-date, the five ESG ETFs with the largest net inflows are:

 

5 ESG ETFs With Biggest YTD Flows  
Ticker Fund Issuer AUM ($M) Expense Ratio Fund Flows ($M) MSCI ESG Score
USSG Xtrackers MSCI USA ESG Leaders Equity ETF Deutsche Bank 845.95 0.10% 845.95 N/A
VSGX Vanguard ESG International Stock ETF Vanguard 223.28 0.15% 153.79 6.35
ESGV Vanguard ESG U.S. Stock ETF Vanguard 266.07 0.12% 148.26 5.48
ESGD iShares ESG MSCI EAFE ETF BlackRock 651.57 0.20% 118.98 8.05
LRGE ClearBridge Large Cap Growth ESG ETF Legg Mason 116.27 0.59% 105.26 6.11

Source: ETF.com; data as of 3/8/19

 

In addition to USSG and the Vanguard funds, two other funds have notched significant block trades over the past few months, likely from institutional sources.

The ClearBridge Large Cap Growth ESG ETF (LRGE), part of Legg Mason's suite of funds, took in roughly $105 million over the course of a week in mid-February. After a year and a half of anemic trading, LRGE saw several consecutive days of $27 million to $30 million in net flows:

 

Source: ETF.com; data range: 2/8/18 to 3/8/19

 

The iShares ESG MSCI EAFE ETF (ESGD) has exhibited an even more intriguing pattern of flows. Since February 2018, iShares ETFs have seen a regular influx of $20 million to $30 million in new cash on the order of every two or three weeks:

 

Source: ETF.com; data range: 3/8/18 to 3/8/19

 

These steady inflows have made ESGD now the fourth-largest socially responsible fund, at $652 million in AUM. Before they began, ESGD only had $144 million in assets; it didn't even rank among the top 10 largest ESG ETFs (read: "Where Are The ESG Flows?").

Institutions Don't Want Thematic ESG

Notably, the five ESG ETFs bringing in the most money year-to-date aren't narrow, thematic funds. In fact, some of the higher-profile thematic funds that have launched in recent years actually have lost assets so far in 2019, including the SPDR SSGA Gender Diversity Index ETF (SHE), which has lost a net $100 million. Meanwhile, UBS's InsightShares LGBT Employment Equality ETF (PRID) and the InsightShares Patriotic Employers ETF (HONR) have lost over 90% of their assets, dropping $23 million and $24 million, respectively.

Instead, the five most successful ESG ETFs all promise to replicate the performance of some broad-based market benchmark, just without any of the sin stocks or other objectionable holdings. That makes these ETFs ideal for replacing some or all of the vanilla ETFs held in a traditional asset allocation strategy, while only realizing a slight bump in overall portfolio cost.

For example, USSG costs just 0.10%, whereas the cheapest U.S. large cap ETFs, the Schwab U.S. Large-Cap ETF (SCHX) and the SPDR Portfolio Large Cap ETF (SPLG), cost 0.03%. That's an annual difference of just $7 per every $10,000 invested.

Essentially, the ESG ETFs that are gaining assets are the ones that offer market performance that's easy on the conscience, while keeping overall costs extremely low—which is exactly what's needed by institutions seeking to satisfy both fiduciary responsibility and ESG investment mandates.

Therefore, as prices on ESG ETFs continue to come down, we'll likely see even more institutional money enter the space—and where institutions go, retail usually follows.

History Repeats Itself

That said, it's worth keeping these big one-day inflows in perspective, because institutional money has flowed into ESG ETFs before—with very little lasting impact.

In 2014, the SPDR MSCI ACWI Low Carbon Target ETF (LOWC) and the iShares MSCI ACWI Low Carbon Target ETF (CRBN) were each seeded with cash from the United Nations Joint Staff Pension Fund, which serves 205,000 current and former UN employees, while CRBN received seed money from the University System of Maryland Foundation. In total, CRBN was seeded with $142 million, while LOWC received $22 million.

Then in 2016, SHE launched with a significant amount of seed capital from CalSTRS, to the tune of $250 million (read: "It's All About ETF Seed Money") .

Finally, last year, the Goldman Sachs JUST U.S. Large Cap Equity ETF (JUST) made a big splash when it took in $250 million in inflows in its first day, likely from “bring your own assets” money from Goldman Sachs itself (read: "'JUST' Takes In $250M Its First Day").

With the exception of CRBN, whose AUM has risen to $413 million, none of these ETFs has pulled in meaningful net inflows since their big debuts. In fact, most have lost assets since their initial influx: SHE is now down to $250 million, down from roughly $330 million this time last year. Meanwhile, JUST is now down to $213 million.

Even CRBN, which remains well funded, has lost $112 million in outflows year-to-date.

Start Of An Avalanche?

So while USSG's massive influx was interesting, it's difficult to draw many conclusions from a single day's—or month's—worth of blockbuster inflows. If the inflows continue, perhaps we can start discussing in earnest whether ESG has finally "hit it big."

In our opinion, what's more interesting are the steady, quiet and regular inflows into funds like ESGD. Flows like these are like a snowball rolling downhill: barely noticeable, perhaps, until the snowball becomes an avalanche.

Contact Lara Crigger at [email protected]

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