As their names suggest, these two ETFs exclude state-owned enterprises from their holdings, which is defined as government ownership of more than 20%.
Less government control is typically seen as a good thing by investors, and this year's returns for CXSE and XSOE clearly support that view. In the U.S., where government ownership of companies is almost nonexistent, good corporate governance involves independent board of directors, shareholder voting rights, accountability for management, gender equality representation in management, reasonable pay for executives, and things of that nature.
Keeping Marketlike Exposure
In some cases, an investor may want to make a principles-based investment, but without straying too far from marketlike exposure. There are a handful of funds that fit the bill. Two of those are among the best-performing ETFs in the space this year: the iShares MSCI EM ESG Optimized ETF (ESGE) and the iShares MSCI EAFE ESG Optimized ETF (ESGD), up 25.6% and 17.1%, respectively.
These companies aim to provide risk and reward similar to their respective MSCI Emerging Markets and EAFE indices while obtaining greater exposure to companies with strong ESG traits. The strategies have worked well this year, delivering returns within 1% of their plain-vanilla counterparts.
Likewise, another pair of ETFs that aims to maintain market-like exposure, while elevating certain do-good companies within their holdings, are the iShares MSCI ACWI Low Carbon Target ETF (CRBN) and the SPDR MSCI ACWI Low Carbon Target ETF (LOWC), each up around 15% this year.
Both these ETFs track the same index, selecting companies that have relatively lower carbon footprint than the broader MSCI ACWI index. Even so, returns for the ETFs have been right in line with the broader market.