5 Intriguing New Sustainable Funds
With more than a dozen open-end and exchange-traded offerings launched this year, we examine the ones to consider.
So far this year, I count 19 new open-end and exchange-traded offerings that I consider sustainable funds, bringing the total to 295. Based on preliminary filings, I expect another half dozen to launch in the fourth quarter.
Here’s a look at five of the more intriguing environmental, social, and governance funds that have been launched in 2019.
Xtrackers S&P 500 ESG ETF (SNPE)
For: Passive investors who want an ESG fund that mirrors the risk/return profile of the S&P 500 index.
Run by DWS, this fund joins four other ESG ETFs in the Xtracker lineup available to U.S. investors and has an expense ratio of only 0.11%. The others are all based on MSCI’s ESG indexes, including one that offers similar core U.S. exposure as this fund. But this one is an ESG version of the well-known S&P 500 index, which may make it a popular substitute for passive investors who want their core U.S. exposure to be tilted toward companies with better ESG credentials.
To be eligible for inclusion in the S&P 500 ESG Index, a company must already be in the S&P 500, pass several exclusionary criteria, and have one of the better ESG scores relative to its GICS industry peers.
Companies with involvement in tobacco and controversial weapons are excluded, as are those that have UN Global Compact scores in the worst 5% globally and those with ESG scores in the worst 25% of their GICS industry peer group. Of those remaining, stocks are selected that represent the top 75% of market capitalization within each industry ranked by their S&P DJI ESG Score.
The result is a portfolio of 318 companies with sector and industry weightings very similar to those of the S&P 500. Among the largest holdings in the S&P 500, several don’t make it into the ESG version: Berkshire Hathaway (BRK.B), Boeing (BA), Facebook (FB), and Wells Fargo (WFC). Because the ESG index is not designed to be fossil-fuel free, though, it does count Exxon Mobil (XOM) and Chevron (CVX) among its largest holdings.
S&P launched the ESG index at the end of January, so performance comparisons are based on back tests and therefore must be taken with a grain of salt, but through September, the ESG version tops the S&P 500 by 0.32% annualized over three years and by 0.11% annualized over five years.
Nuveen ESG High Yield Corporate Bond ETF (NUHY)
For: Passive investors building out ESG portfolios.
This fund joins Nuveen’s suite of 10 ESG ETFs, which are designed as building blocks for diversified ESG portfolios. Most are equity funds; this one joins Nuveen ESG US Aggregate Bond ETF (NUBD) on the bond side to give investors access to a fixed-income subasset class that is often used in model portfolios but not often found among sustainable funds. It is one of only four high-yield ESG-focused funds available to U.S. investors, and the only ETF.
The fund tracks the Bloomberg Barclays MSCI US High Yield Very Liquid ESG Select Index. That index is derived from a base index of below-investment-grade corporate bonds that have above-average liquidity. Securities are eligible for selection if the companies meet a minimum ESG rating threshold and are not involved in controversial activities and products, including tobacco, nuclear power, gambling, firearms, and military weapons. Eligible securities are sorted into groups based on credit rating and ESG score, and the portfolio is allocated to maximize ESG rating while holding other factors, like sector weights and credit quality, close to that of the base index.
The portfolio contains 214 holdings and, because of the “Very Liquid” nature of the index, has a credit profile that is a bit higher than that of the high-yield Morningstar Category average. Its expense ratio is 0.35%.
Federated Hermes SDG Engagement High Yield Credit Fund FHHIX
For: Investors who want portfolios that generate impact alongside financial return.
Another brand new high-yield offering in the sustainable investing space, this one is focused on driving impact through engagement while providing competitive investment returns. In 2018, Federated Investors became a majority owner of Hermes Investment Management, a London-based asset manager that also has a history of providing engagement services to investors. Engagement refers to the process of meeting with companies to improve their performance on material ESG issues.
The portfolio itself should look much like a standard high-yield offering in terms of duration and credit quality but will be focused on securities that contribute “to positive societal impact aligned to the United Nations Sustainable Development Goals (UN SDGs).”
The UN SDGs are 17 global goals to be achieved by 2030 to address the world’s sustainability challenges related to issues like climate, environmental degradation, inequality, poverty, peace, and justice. While the UN SDGs were not intended specifically as an investment framework, they have been widely embraced by sustainable investors as a way to address the societal impact of investments.
Holdings of the fund must be aligned with at least one of the UN SDGs, and management plans to use the UN SDGs “as a framework for identifying, articulating and measuring positive impact opportunities within the companies it chooses to invest.”
Fidelity Women’s Leadership (FWOMX)
For: Investors who want a core U.S. equity portfolio that supports women’s leadership and gender diversity in corporate America.
This is an actively managed, U.S. equity fund investing primarily in companies that prioritize and advance women’s leadership, with an expense ratio of 1.00%. To make it into the portfolio, companies must have a woman on the senior management team or have women comprising at least a third of company directors or have adopted policies designed to attract, retain, and promote women, such as parental-leave, gender-pay-gap, and flexible-work policies. Beyond that, manager Nicole Connolly looks for a mix of quality companies with competitive moats and up-and-coming growth stories.
The portfolio is mostly large-cap, somewhat tilted toward growth, and well diversified across sectors. It does have some sector over- and underweights but none too extreme. It therefore can be used for core large-cap exposure. Because the investment criteria aren’t limited to counting the number of women in leadership but also include policies that benefit women (and, I would argue, therefore men, too), the portfolio is tilted toward companies that tend to have good overall ESG credentials. Top holdings include Microsoft (MSFT), Disney (DIS), Anthem (ANTM), and Accenture (ACN).
Vanguard Global ESG Select Stock (VEIGX)
For: Investors who want a compact high-conviction ESG global equity portfolio.
I wrote in some detail about this actively managed fund back in May, just prior to its launch. It is run by Wellington Management, a longtime Vanguard subadvisor that manages more than $350 billion in various mandates for the firm. The expense ratio for the fund’s Investor shares is 0.55%.
It has a compact portfolio of around 40 names, which are intended to “demonstrate exemplary long-standing ESG practices and have strong business fundamentals and management teams with proven track records of good capital allocation decisions.” Wellington intends to hold stocks over the long run and will be responsible for shareholder-engagement activities and proxy voting.
I like the overall approach of Wellington being an active owner running a compact low-turnover portfolio. Too many active managers water down their portfolios with weak-conviction stocks. That tendency can especially work against ESG portfolios, which often end up looking not terribly different from conventional ones. While its ESG work has been largely under the radar, Wellington is a top-quality manager that can be expected to implement ESG in a thoughtful way. It has already integrated ESG analysis firmwide.
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Jon Hale has been researching the fund industry since 1995. He is Morningstar’s director of ESG research for the Americas and a member of Morningstar's investment research department. While Morningstar typically agrees with the views Jon expresses on ESG matters, they represent his own views.
Jon Hale does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.