The Cheapest ESG ETF Portfolio

Socially responsible investing doesn't have to break the bank. Fee wars, deepening liquidity and robust product launches have brought down the total cost of ownership for ESG ETFs substantially, such that the hardest choice investors now face is picking among the lowest-cost options.

“The Cheapest ESG ETF Portfolio," a back-of-the-envelope model of the least expensive U.S.-listed ETFs in each of six broad asset classes, reflect this.

When I last updated the model more than a year and a half ago, I was able to get its total blended cost down to 0.167%. (For more on that, read "Cheapest ESG ETF Portfolio Gets Cheaper," as well as the original article debuting the model.)

Since then, a lot has changed—not just in the world at large, but in the ETF industry, too. We've seen the passage of the ETF Rule; supercharged launch and closure activity; the rise of the so-called Robinhood trader; and frankly staggering inflows into ESG funds—of which there are a lot more lately.

As the breadth of ESG products grows, and costs in this historically high-fee segment continue to decline, I've been able to shake up The Cheapest ESG ETF Portfolio significantly, while still broadly diversifying across more than 2,000 unique stocks and increasing its bond exposure tenfold.

Oh, and now 90% of the portfolio is completely fossil fuel-free.

The best part? It all costs just 0.157%.

Building The Cheapest ESG ETF Portfolio

To construct The Cheapest ESG ETF Portfolio, I opted for the least expensive socially responsible ETFs in each of six asset categories, giving no consideration to index, liquidity, assets under management or even trading costs. Expense ratio was my primary selection guide.

For the first time, however, some of the asset classes offered more than one ETF at the lowest price point. Deciding among these options was difficult. In the sections that follow, I did my best to justify my selections, but ESG investing can be a fairly subjective process, and different readers may choose differently.

Ultimately, the final portfolio provides exposure to 2,020 stocks from over 30 countries, as well as 1,719 U.S. market bonds. What's more, its blended expense ratio of 0.157% costs less than half the expense ratio of the average bond ETF (0.34%) and one-third that of the average equity ETF (0.54%).

Source: ETF.com; data as of Oct. 21, 2020

US Equity: ESGV

There are 964 ways and counting to slice and dice the U.S. equity market with ETFs. However, in the interest of keeping things simple, I decided to use a total market ETF.

In the past, that led me to the Vanguard ESG U.S. Stock ETF (ESGV). But there are now three "total market" ESG ETFs that undercut ESGV by 2 basis points—and 3 basis points, in the case of the IQ Candriam ESG U.S. Equity ETF (IQSU):

Source: ETF.com; data as of Oct. 21, 2020

Additionally, there are now three ESG-screened S&P 500 ETFs that cost less than ESGV:

Source: ETF.com; data as of Oct. 21, 2020

So why am I sticking with ESGV? It's a tough call, I'll admit. But I did say I wanted a total market fund, and of the above ETFs, ESGV best meets that requirement. It has the largest allocation to midcap stocks, and it's also the only one to dip into small cap stocks:

Source: ETFAction. Date as of Oct. 21, 2020.

One other curious point to note: Of the five U.S. total market ESG ETFs listed above, only ESGV explicitly excises fossil fuel companies from its portfolio. That serves as an unexpected bonus in favor of ESGV, given that so many investors nowadays want to reduce or eliminate their portfolio exposure to traditional oil, coal and gas.

Int’l Equities: DMXF & EMXF

Our international equity allocation changed substantially from last time.

For our developed markets ex-U.S. exposure, I swapped out the Xtrackers MSCI EAFE ESG Leaders Equity ETF (EASG), which costs 0.14%, for the iShares ESG Advanced MSCI EAFE ETF (DMXF), which costs 0.12%.

Intriguingly, this switch also adds some more exclusionary screens that should be welcome to many environmentally  and socially minded investors, including getting rid of fossil fuel companies, for-profit prisons, predatory lenders and palm oil companies.

For our emerging market exposure, I'd previously used the iShares ESG MSCI EM ETF (ESGE), which cost 0.25%. But now two other emerging market ESG ETFs have much lower expense ratios: the iShares ESG MSCI EM Leaders ETF (LDEM) and the iShares ESG Advanced MSCI EM ETF (EMXF). Both cost 0.16%.

Of the two, LDEM has the broader portfolio, with almost 100 additional stocks that EMXF doesn't have. That's because EMXF has the far more stringent ESG screens; like DMXF, it doesn't hold fossil fuel companies, for-profit prisons, predatory lenders or palm oil companies.

In fact, I'd argue that EMXF is probably the more "ESG-y" of the two funds, at least in terms of what values-based investors are expecting. For that reason, I've opted for EMXF—but LDEM is just as valid a choice.

The upside to using EMXF? The choice makes our entire "traditional" equity allocation of The Cheapest ESG ETF Portfolio fossil fuel free. (Commodities are a different story; see below.)

Fixed Income: EUSB

I had another difficult choice for the fixed income allocation. Previously, I'd been using the iShares ESG Aware U.S. Aggregate Bond ETF (EAGG), an ESG-skinned take on the popular Bloomberg Barclays MSCI U.S. Aggregate Bond Index (aka, the "Agg"). EAGG costs 0.10%, making it an extremely cheap option for broad U.S. bond exposure, ESG or not.

However, EAGG is no longer the sole broad market approach. In fact, ESG bond ETFs have flourished since the last time I updated the model, with now 17 funds on the market instead of just six.

One of those is the iShares ESG Advanced Total USD Bond Market ETF (EUSB), a total market approach that covers more segments of the U.S. bond market than EAGG. Whereas EAGG only tracks investment grade credit, EUSB covers both investment grade and high yield debt, all in one package. (To be fair, EUSB doesn't have much exposure to bonds rated BB and below: The total allocation is just under 6%.)

For completeness' sake, I've opted for EUSB over EAGG. However, this does bump up the cost of our fixed income allocation by 2 basis points.

One silver lining? EUSB follows the same "Advanced" exclusionary screens as DMXF and EMXF—meaning the entire fixed income allocation is also free of debt from fossil fuel companies, as well as predatory lenders, palm oil and for-profit prisons.

What Didn't Change: PPTY & CNRG

Aside from U.S. equities, two other asset classes that didn't change were commodities and real estate, where true ESG-branded options don't exist. As a result, I settled for the next closest thing.

For commodities, that means clean power equities. Once again, the SPDR S&P Kensho Clean Power ETF (CNRG), at 0.45%, is the cheapest option of the renewable energy ETFs.

But I include CNRG with a huge caveat: If you're looking for a clean energy ETF that's free of fossil fuel companies, this isn't it. According to As You Sow data, CNRG allocates an eye-watering 19% of its portfolio to fossil fuel stocks. (Why? Because many of the companies investing most heavily in clean power are: 1) oil companies complementing their offerings with wind; and 2) fossil-fuel-fired utilities expanding their renewable capacity.)

So while I'm sticking with CNRG for the time being, I'd be remiss if I didn't point out that 100% fossil fuel free renewable power ETFs do exist, including the First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN), which, at 0.60%, is the cheapest.

Real estate is a tougher call. Though a few select ESG-themed real estate ETFs have launched overseas, so far none has debuted stateside. As a result, for my model, I'm sticking with the U.S. Diversified Real Estate ETF (PPTY), which uses governance characteristics in addition to other criteria when evaluating which REITs to hold.

Although the fund hasn't changed since last time, its price tag has: Earlier this year, PPTY dropped from 0.53% to 0.49%.

Cost & Values In 1 Package

I always end these articles with some caution about how The Cheapest ESG ETF Portfolio is only meant to be a yardstick of pricing, not an investable portfolio. That remains as true as it ever was: So much more must go into portfolio creation, including performance, liquidity, risks, time horizon and so on.

Yet I was surprised to find that so many of the cheapest options in the ESG space were also genuinely good ESG picks, at least in terms of the sorts of exclusionary screens that many socially and environmentally conscious investors want to use. Honestly, I didn't set out to build a model that was 90% or more fossil fuel free. That's just what happened.

However, it does reinforce the point that you don't have to sacrifice your values to invest; and more importantly, neither do investors need to settle for half-baked, “greenwashed” ESG investments. If you want that super-cheap, broadly diversified portfolio without any fossil fuel companies in it, have at it. Because that's now entirely within your reach.

Contact Lara Crigger at [email protected]