ETF Investors Embrace ESG 'Lifestyle'
Flows data suggests socially responsible investors want to build asset allocations, not capture hot trends.
Though socially responsible funds as a market segment remain small compared to the rest of the $4 trillion ETF market, their pace of growth is accelerating in 2019, thanks to a few high-profile launches and billion dollar bets.
Year to date, investors have poured $4.7 billion into socially responsible ETFs, also known as environmental, social and governance (ESG) ETFs, almost twice the total money that went into these funds in 2018. Last year, investors added $2.6 billion to the space.
More than half of this year's flows went into two specific funds, the iShares ESG MSCI USA Leaders ETF (SUSL) and the Xtrackers MSCI U.S.A. ESG Leaders Equity ETF (USSG), both of which were seeded by the same institutional investor, Ilmarinen. Year to date, SUSL and USSG have taken in $1.4 billion and $1.2 billion, respectively (read: "Institutional Money Comes To ESG ETFs").
Other big draws were the Vanguard ESG ETFs and several iShares ESG funds (see below) designed to replace or supplement key core asset allocations.
The ETFs with the highest 2019 flows are listed below:
| ESG ETFs With Highest Net Inflows In 2019 | ||||||||
| Ticker | Fund | Expense Ratio | AUM ($M) | YTD Returns | 1-Yr Returns | YTD Flows ($M) | 1-Yr Flows ($M) | MSCI ESG Rating |
| SUSL | iShares ESG MSCI USA Leaders ETF | 0.10% | 1,430 | -- | -- | 1367 | 1367 | -- |
| USSG | Xtrackers MSCI U.S.A. ESG Leaders Equity ETF | 0.10% | 1,210 | -- | -- | 1126 | 1126 | -- |
| ESGV | Vanguard ESG U.S. Stock ETF | 0.12% | 534 | 21.61% | -- | 385 | 497 | BBB |
| VSGX | Vanguard ESG International Stock ETF | 0.15% | 383 | 13.26% | -- | 307 | 373 | A |
| ESGD | iShares ESG MSCI EAFE ETF | 0.20% | 837 | 13.83% | -0.52% | 291 | 527 | AA |
| ESGE | iShares ESG MSCI EM ETF | 0.25% | 705 | 11.09% | 0.84% | 248 | 375 | A |
| SUSA | iShares MSCI U.S.A. ESG Select ETF | 0.25% | 1,110 | 20.05% | 8.71% | 172 | 313 | AA |
| LRGE | ClearBridge Large Cap Growth ESG ETF | 0.60% | 156 | 23.71% | 12.44% | 133 | 139 | A |
| ESGU | iShares ESG MSCI U.S.A. ETF | 0.15% | 258 | 20.11% | 9.41% | 105 | 155 | A |
| CATH | Global X S&P 500 Catholic Values ETF | 0.29% | 267 | 20.28% | 8.05% | 86 | 91 | BBB |
Source: ETF.com; data as of July 10, 2019
Low-Cost Core Products Attract Most Flows
The common theme between the top flows gatherers is that they are all broad-based, core ETFs designed to supplement or replace vanilla exposure in an asset allocation plan.
For example, the iShares ESG MSCI EAFE ETF (ESGD) and the iShares ESG MSCI EM ETF (ESGE) both track virtually the same exposures as the iShares MSCI EAFE ETF (EFA) and the iShares MSCI Emerging Markets Index (EEM), just with several exclusionary screens to exclude securities rated to be the worst ESG offenders.
Notably, the top-drawing ETFs are almost all low-cost. With one exception, they all have expense ratios below 0.30%; the five ETFs with the biggest year-to-date flows are priced at or below 0.20%.
The fact that low-cost core products reign supreme in the ESG space runs counter to many assumptions around the space; namely, that these ETFs are dominated by narrow, thematic funds designed to capitalize on the next "green" fad.
Hot Thematic Funds See Outflows
In fact, most thematic ESG ETFs have not attracted anywhere near the same kinds of flows that these broad-core funds have.
The thematic ETF with the highest flows is the Global X S&P 500 Catholic Values ETF (CATH), which screens large cap U.S. stocks for their compliance to Catholic values. CATH has brought in $86 million year to date.
However, most thematic ESG ETFs have seen flat to negative flows for 2019. In fact, some high profile thematic funds have experienced significant losses, including the SPDR SSGA Gender Diversity Index ETF (SHE), the iShares MSCI ACWI Low Carbon Target ETF (CRBN) and the Goldman Sachs JUST U.S. Large Cap Equity ETF (JUST). SHE, CRBN and JUST lost $73 million, $88 million and $96 million, respectively.
| ESG ETFs With Highest Outflows In 2019 | ||||||||
| Ticker | Fund | Expense Ratio | AUM ($M) | YTD Returns | 1-Yr Returns | YTD Flows ($M) | 1-Yr Flows ($M) | MSCI ESG Rating |
| PBD | Invesco Global Clean Energy ETF | 0.75% | 50 | 21.73% | 6.69% | -4 | -7 | A |
| NULG | Nuveen ESG Large-Cap Growth ETF | 0.35% | 58 | 24.99% | 11.23% | -11 | 3 | AA |
| CXSE | WisdomTree China ex-State-Owned Enterprises Fund | 0.32% | 141 | 21.03% | -9.91% | -14 | -40 | BB |
| MAGA | Point Bridge GOP Stock Tracker ETF | 0.72% | 16 | 17.93% | 0.45% | -20 | -22 | BBB |
| PRID | InsightShares LGBT Employment Equality ETF | 0.65% | 3 | 20.05% | 9.48% | -23 | -23 | BBB |
| HONR | InsightShares Patriotic Employers ETF | 0.65% | 1 | 22.02% | 9.79% | -24 | -24 | BBB |
| LOWC | SPDR MSCI ACWI Low Carbon Target ETF | 0.20% | 74 | 18.20% | 4.95% | -71 | -80 | BBB |
| SHE | SPDR SSGA Gender Diversity Index ETF | 0.20% | 293 | 17.69% | 7.91% | -73 | -42 | A |
| CRBN | iShares MSCI ACWI Low Carbon Target ETF | 0.20% | 458 | 18.69% | 5.47% | -88 | -77 | BBB |
| JUST | Goldman Sachs JUST U.S. Large Cap Equity ETF | 0.20% | 128 | 18.85% | 7.20% | -96 | -137 | A |
Source: ETF.com; data as of July 10, 2019
Interestingly, although most of the ETFs that have bled investment assets have all been higher cost, SHE, CRBN and JUST all carry expense ratios of just 0.20%.
ESG As Investment ‘Lifestyle’
Flows data suggests that ETF investors are approaching socially responsible investing not as a thematic play but as an investment lifestyle, hoping to convert some or all of their existing asset allocations to more ethically acceptable alternatives without sacrificing market performance.
That's further underscored by the fact that once investors have selected ESG-flavored core products, they tend to stick with them.
Assets in the ESG versions of low-cost core ETFs have proven remarkably sticky. For example, SUSL, USSG, the Vanguard ESG U.S. Stock ETF (ESGV) and the Vanguard ESG International Stock ETF (VSGX) have not experienced a single day of outflows since they launched. ESGE and ESGD haven't seen outflows since mid-2018.
We've often likened socially responsible ETFs to a snowball rolling downhill. If investors continue to park their money into these core ESG products, we may see that snowball become an avalanche sooner rather than later.
Contact Lara Crigger at [email protected]
