World's Cheapest ESG ETF Portfolio

May 16, 2018

Few ESG Options For Real Estate

When it comes to the real estate and commodity categories, which together comprise 10% of the model portfolio, I had to fudge things a little. That's because, at the moment, there aren't any ETFs marketed as "ESG" in either of these two asset classes.

I say "marketed as," because there is at least one real estate ETF that actually uses some ESG criteria in its selection process: the U.S. Diversified Real Estate ETF (PPTY).

Launched by Vident, a firm known for its "principles-based investing" approach, PPTY blends ESG screens with smart-beta indexing by excluding 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.

PPTY has an expense ratio of 0.53%, which is only three basis points more than the average expense ratio for the real estate sector (0.50%).

ESG In Commodity Equities

For commodities, there aren't any futures-based ETFs with an ESG angle. There are, however, several equity-based ESG ETFs—specifically, renewable energy ETFs.

The cheapest and broadest, the iShares Global Clean Energy ETF (ICLN), holds a diversified basket of global renewable energy companies, including biofuels, geothermal, hydroelectric, solar and wind stocks.

ICLN has an expense ratio of 0.48%, which is significantly cheaper than the average vanilla energy ETF (0.73%).

Getting Even Cheaper With ESG

But let's say you don't accept my fudges. PPTY doesn't count, you say, because ESG isn't the primary input for security selection; renewable energy stocks just aren't the same thing as commodity futures; and we should stick to as pure a definition of ESG as possible.

So let's put the 10% of the portfolio that would have gone into real estate and commodities into cash. Holding the rest of the allocations unchanged, you end up with a blended expense ratio of the full portfolio of 0.16%.

Or if we instead revert to a classic 60/40 portfolio, with 60% in stocks and 40% in bonds—to keep things simple, let's split that 60% stock allocation into 30% U.S. stocks, 20% developed-market stocks and 10% emerging market equities—the portfolio's blended expense ratio drops to 0.19%:


World’s Cheapest ESG ETF Portfolio (60/40 version)
Asset Class Weight Fund Ticker Expense Ratio MSCI ESG Score
U.S. Equity 30% iShares MSCI U.S.A. ESG Optimized ETF ESGU 0.15% 6.96
Developed Markets Equity 20% iShares MSCI EAFE ESG Optimized ETF ESGD 0.20% 8.05
Emerging Markets Equity 10% iShares MSCI EM ESG Optimized ETF ESGE 0.25% 5.91
Fixed Income 40% NuShares ESG U.S. Aggregate Bond ETF NUBD 0.20% 6.92
    Blended Expense Ratio   0.19%  

Source:; data as of May 10, 2018


Starting Point

Like I said at the start, the World's Cheapest ESG ETF Portfolio is only that: cheap. Cost tells you nothing about how a fund performs, how liquid it is, how volatile, what risks it exposes you to and so on.

Still, it's important to note there are inexpensive ESG options out there, and they keep getting cheaper over time. The same competitive forces driving down costs across the rest of the ETF market are also spurring issuers of ESG ETFs to lower their fees.

While the World's Cheapest ESG ETF Portfolio may never be as cheap as Matt's old model, 0.21% isn't half bad—especially if this serves as just the starting point for fees, and it only goes down from here.  

Contact Lara Crigger at [email protected]

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