Talk about a shift in sentiment. A half decade ago, socially responsible investing (SRI) funds weren’t discussed much with clients. Most advisors assumed that narrowing the focus on this investing niche exacted a heavy toll in performance.
Yet recent studies show that SRI funds (also known as “ESG” or environment, social and governance investing) are not the investment duds that detractors paint them as.
Perhaps the best-known study on the topic came from Nuveen in July 2017 that compared five SRI-based indexes to the Russell 3000 and the S&P 500 indexes over a decade and found “no statistical difference in RI [responsible investing] index returns compared to the two broad market benchmarks.” It added that responsible investing can achieve comparable performance over the long term without additional risk, despite using a smaller universe of securities meeting ESG criteria.
“There is no longer a need to trade value for values,” says Sarah Kjellberg, head of U.S. Sustainable Investing at iShares.
Simply put, advisors should no longer fear a discussion around these socially-conscious ETFs with our clients. And advisors are now almost spoiled for choice. Kjellberg says that 40 percent of the funds in the sustainable investing category (including both ETFs and mutual funds) have been launched in the past three years.
“Prior to 2016, most sustainable ETFs focused on niche areas such as clean energy or water, but we’re now seeing a lot more core funds that focus more broadly on firms that have good sustainability practices,” says Kjellberg.
With $1.4 billion in assets and a 0.25 percent expense ratio, the iShares MSCI KLD 400 Social ETF (DSI) is the largest in the category. In effect, this fund excludes the 100 firms in the MSCI USA Index that score the lowest in ESG criteria and screens out companies involved in tobacco, weapons, gambling and a few other sectors. The fund seeks to track the longest-running socially responsible index, which was created in 1990. In that time, the index has slightly outperformed the S&P 500.
And the cost of entry into the space keeps dropping. Last October, for example, iShares launched seven new sustainable funds with expense ratios ranging from 10 to 25 basis points. These “core funds” enable investors “to put ESG in the center of their portfolios,” says Kjellberg, and not simply use them for small tactical positions.
While iShares says it has garnered roughly $5 billion in assets in its various sustainability-focused ETFs, a growing slate of fund families are now getting in on the action, too. Finding the right fund for each client starts with a discussion about which kinds of issues they most highly prize. For example, the SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX) could be a good choice for clients concerned about climate change. The fund has attracted $350 million in assets during its nearly three-and-a-half year existence, and carries a reasonable 0.20 percent expense ratio.
The fund’s three-year average annual return of 15 percent has topped the S&P 500 by an average of about 40 basis points per year, in large part because its top holdings comprise leading tech companies, many of which have used clean energy sources to power their data centers.