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Some investors seek returns beyond monetary rewards. Their criteria include investing in companies that are committed to having a positive impact on the environment, offering fair compensation to employees, and a board that cares about the interests of customers.
Investors concerned about environmental, social and governance (ESG) investments diversify their portfolios by investing in a ESG FCP or exchange-traded funds (ETFs) while ensuring that the company they have invested in cares about its stakeholders and the environment.
Although many companies adhere to strict ESG standards, only some offer significant returns while offering low costs. Benzinga explores the top five ESG mutual funds and ETFs.
The Best ESG Mutual Funds and ETFs
The number one thing ESG investors look for in companies is their level of commitment to the environment, social justice and governance. While ESG issues are important to these investors, so are earnings. Mutual funds and ESG ETFs should have a track record of good returns.
High fund management costs reduce profits and can cause investors to lose money if returns are low. Benzinga chose mutual funds and ETFs comprised of ESG companies with a strong track record of earnings and low costs.
Vanguard FTSE Social Index Fund Admiral Shares Mutual Fund
The Vanguard FTSE Social Index Admiral Shares fund is a mutual fund comprised of mid and large market capitalization companies. The fund tracks the performance of the FTSE4Good US Select Index and excludes stocks of companies in the alcohol, tobacco and weapons sectors. It also excludes companies that violate human and labor rights.
One of the reasons investors find VFTAX attractive is the low expense ratio of 0.14%. This ratio is one of the lowest on the market because the fund is passively managed. Investors must contribute at least $3,000 to the fund, which has a 19% return over three years.
The majority of the fund is made up of technology companies, with a significant portion of consumer discretionary and healthcare companies. An institutional version of the fund requires a minimum investment of $5 million and offers an expense ratio of 0.12%.
iShares Global Clean Energy ETF
iShares Global Clean Energy ETF (NASDAQ: ICLN) is an ETF managed by BlackRock that tracks the S&P Global Clean Energy Index. The fund was launched in 2008 and consists of clean energy companies primarily in the utilities, technology and industrials sectors.
ICLN has an expense ratio of 0.42% and a return of 10% over 10 years. Its 5-year return is even more impressive — 21%. The fund’s five-year performance beat the S&P 500, but its 10-year performance lagged the benchmark. It offers semi-annual distributions.
The fund provided an annual return of 141% in 2020, but you should also note that it has a standard deviation of over 30%, which makes it very volatile.
Mutual Fund Parnassus Core Equity Fund
Parnassus Core Equity Fund is a mutual fund that consists of large capitalization companies and has over $27 billion in assets. The fund has a net expense ratio of 0.82% because it is actively managed and requires a minimum investment of $2,000.
PRBLX consists of companies in the information technology, industrial and communication services sectors while avoiding companies that derive the bulk of their income from alcohol, weapons and nuclear energy .
The fund’s average annual return for three consecutive years has been just over 20%. It has a 10-year rolling yield of over 14%. The primary reasons for the strong performance of the fund are downside protection while participating in market rallies of an 89% upside capture.
iShares MSCI USA ESG Select ETF
iShares MSCI USA ESG Select ETF (NYSEARCA: SUSA) consists of mid- and large-cap US stocks and avoids low-rated ESG companies. It tracks the MSCI USA Extended ESG Select Index. The fund’s largest investments are in information technology companies such as Microsoft Corp. (NASDAQ: MSFT) and Apple Inc. (NASDAQ:AAPL).
The fund’s expense ratio is 0.25% and it has provided a rolling 5-year return of just over 15%. Its 10-year rolling yield is slightly above 13%. The fund pays quarterly distributions and has net assets of over $3.4 billion.
Shelton Green Alpha Mutual Fund
the Shelton Green Alpha Fund (NEXTX) is a mutual fund that invests in companies providing products and services that reduce environmental risk, improve human well-being and increase economic efficiency.
This mutual fund is suitable for investors who can tolerate high volatility and high management fees — 1.16%. In exchange for a high expense ratio, investors received significant returns. The fund provided an average return of 31% over three years and a rolling return of 22% over five years.
The Shelton Green Alpha Fund was established in March 2013 and has a minimum investment of $1,000.
What is an ESG mutual fund or ETF?
ESG mutual funds and ETFs are made up of stocks and bonds that consider environmental, social and governance issues. Investors targeting these funds are committed to socially responsible investing (SRI).
ESG mutual fund and ETF managers invest in companies that exceed strict ESG standards. These are companies with a high sustainability score, and fund managers avoid companies that practice poor labor relations and have low standards for pollution and stakeholder engagement.
Although investors in these funds seek investments in companies that value social and environmental causes, the companies must also provide meaningful returns. Several ESG mutual funds and ETFs have outperformed the S&P 500, and some offer low expense ratios.
How do mutual funds and ETFs work?
A mutual fund or ETF is a pool of money raised from investors. Fund managers use the money raised to buy stocks, bonds and other securities aligned with the fund’s objective. Investment in funds can be passive or active.
Passive investing is done through index funds and ETFs. The cost associated with these funds is generally low because the manager’s involvement with the fund is minimal. Fund managers are active when they regularly buy and sell securities to outperform the market.
Actively managed funds cost more than passive funds. But investors can make bigger profits because passive investing aims to match the returns of an index fund such as the S&P 500. Since a mutual fund or ETF is made up of many companies, it inherently diversifies your wallet.
You can invest in a fund that offers stocks, bonds, or a mix of both. For example, some funds are made up of companies with only large market capitalizations or international companies.
What to Look for in ESG Mutual Funds and ETFs
Investors looking to grow their money in ESG mutual funds and ETFs should consider several factors to ensure that the stocks and bonds they invest in align with their values and goals.
Environment: A key aspect that ESG investors look for in a company is its management of environmental impact. They want to know if a company’s products and services harm the environment by polluting the air or water.
ESG investing involves paying attention to a company’s sustainability efforts in the supply chain and its strategies to reduce its carbon footprint. They are interested in investing in businesses that are fossil fuel free and in those that use renewable energy sources.
Social: The social aspect that investors look for in ESG funds includes a company’s treatment of people and its commitment to labor rights. They want to know that the company compensates its employees fairly and provides equal employment opportunities.
ESG investors care about companies that support local communities and sponsor healthcare, education and housing.
Governance : A company that adheres to strict ESG standards has policies that benefit the company’s stakeholders. ESG investors are interested in companies that provide balanced remuneration between managers and employees. It is important to them that a company adheres to ethical business practices.
Return: ESG funds track a market index fund using it as a benchmark. You should invest in a fund that outperforms the tracked fund. But at the very least, it should match the returns of the tracked index fund.
Costs: Since most ESG mutual funds are passively managed, their costs are low. Some funds have a high expense ratio, so they must have a track record of outperforming the market to be profitable investments.
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Frequently Asked Questions
What is ESG in a mutual fund or ETF?
What is ESG in a mutual fund or ETF?
ESG is an acronym for Environment, Social and Governance in mutual fund investment and ETF investment. ESG Investors buy stocks and bonds in mutual funds or AND F that meet strict standards of responsible environmental, social and governance operations.
Are ESG funds a good investment?
Are ESG funds a good investment?
The return of an ESG mutual fund or ETFs depends on its performance and associated costs. Some ESG Mutual Funds and ETFs have consistently outperformed the market and offer a low expense ratio.