Sustainability ETFs Still Shining Despite Investor Pullback. Here are the 4 Largest

Despite US investors pulling away from environmental, social and governance funds for 12 straight quarters, a trend that prompted $5.2 billion of outflows in the three months through September alone, some sustainability funds are still generating noteworthy returns. 

For instance, the Xtrackers S&P 500 Growth Scored & Screened ETF (SNPG B), a smaller ESG fund by asset size that launched in November 2022, has outperformed all its non-crypto ETF counterparts, returning nearly 27% over the past three years, according to ETF Database data. Originally called the Xtrackers S&P 500 Growth ESG ETF, it tracks companies with strong growth and positive environmental, social and governance traits.

While its success might not be a harbinger of a second heyday for ESG funds, it does showcase the sector’s endurance and its potential returns, even outside of the spotlight. 

What Are ESG ETFs?

ESG ETFs, or sustainability funds, provide investment opportunities in companies that focus on environmental (i.e. climate change, natural resources), social (diversity, relationships with staff, customers and surrounding communities), and governance (corporate oversight) responsibility and don’t just rely on risk and return. Typical ESG investment portfolios also exclude association with alcohol, tobacco, gambling and weapons products. 

As with any type of ETF investment, there are pros and cons to weigh:

Pros 

• Easy portfolio incorporation/diversification: There are a number of sustainable investment options through ESG ETFs, from those focused on companies with high ESG ratings to others that value clean energy or gender diversity. Some ESG ETFs even offer a one-ticket approach, allowing investors to combine several different ETFs into a single diversified portfolio or investment. 
• Better long-term returns: Like the aforementioned SNPG B, ESG investments may have a better chance of outperforming non-ESG investments in the long term, giving investors higher equity returns and reduced risks in the process. 
• Value alignment and creating positive impact: ESG ETFs allow investors to align with companies that reflect their own ethics through their mission statement, values and practices such as investing in green bonds for reducing emissions and environmentally responsible sourcing. 

Cons 

• Greenwashing:  Without standardized data, companies may make false claims about how ESG-friendly their products really are, resulting in consumer distrust. 
• Fixed income limitations:  Due to strict disclosure requirements, fixed-income ESG investment options are limited compared with equity asset class choices.

Sustainability ETF Standouts

While ESG ETFs have experienced some turbulence recently, there’s optimism about the sector’s future. As a 2024 Bloomberg Intelligence study noted, ESG assets are projected to exceed $40 trillion by 2030, reflecting resilience with investors. Here are the four biggest ESG ETFs this year with top performance ratings from Morningstar analysts: 

• iShares ESG Aware MSCI USA ETF: ESGU holds $15.2 billion in assets and boasts a total return of 17% this year. Introduced in December 2016, it carries an expense ratio of 0.15% and tracks an index of companies with positive environmental, social and governance characteristics. 
• Vanguard ESG US Stock ETF: With $11.8 billion in assets, ESGV has posted a total return of 17% this year. Introduced in September 2018, it carries an expense ratio of 0.09% and seeks to track the FTSE US All Cap Choice Index with stocks screened for environmental, social and governance criteria and excluding some firms with revenue from industries such as adult entertainment, cannabis, alcohol and tobacco.
• iShares ESG Aware MSCI EAFE ETF: Introduced in June 2016, ESGD has a total return of 27% this year and holds $10.6 billion in assets. With an expense ratio of 0.21, it tracks an index of large and mid-cap firms in developed markets outside the US and Canada with positive environmental, social and governance characteristics. 
• iShares ESG Aware MSCI EM ETF: With $5.5 billion in assets, ESGE has returned 32% this year and was introduced in June 2016. It carries an expense ratio of 0.26% and tracks an index of large and mid-cap companies in emerging markets with positive environmental, social and governance characteristics.