This Week’s ETF Launches: iShares Goes Global With ESG

Both BlackRock’s (BLK) iShares and Guggenheim have very successful environmental, social and governance (ESG) and equal-weight suites of funds. This week’s launches capitalize on those existing successful product lines and expand investors’ targeted access using the two smart-beta screening methods.

Investors are finally warming up to the idea of aligning their values with their portfolios. ESG investing has finally come into its own as these investors look to add various ESG requirements to their holdings. As one of the early adopters in the ETF space, iShares controls the lion’s share of assets in the space with its two funds — the iShares MSCI KLD 400 Social ETF (DSI A-) and iShares MSCI USA ESG Select ETF (KLD B).

The problem is that both these funds — and the vast bulk of ESG/socially responsible ETFs — focus solely on the United States. Investors looking to add a dose of ESG to their international holdings were left out.

To circumvent that issue, iShares has launched both the iShares MSCI EAFE ESG Select ETF (ESGD A-) and iShares MSCI EM ESG Select ETF (ESGE A-).

The two new ETFs will track similar indexes from MSCI that screen for large- and mid-capitalization stocks for various ESG metrics. These can include firms that have low carbon scores, great workplace diversity, ethical business practices, sustainability or can be as simple as eschewing tobacco/weapon manufacturing. MSCI uses a unique propriety ratings system that allows company-/sector-specific ESG requirements to shine through based on their relevance. For example, financial and energy firms have very different approaches to carbon. Putting the same weight on that factor for each sector doesn’t make sense.

The difference between the new funds is where they will screen. ESGD will focus on the developed international market and includes exposure to Europe, Japan and Australia. ESGE will home in on the emerging world.

Expense ratios for the new ESG ETFs are pretty similar and cheap as well. ESGD will charge just 0.40%, while ESGE will charge 0.45%- or $45 per $10,000 invested.

One of the problems that smart-beta is trying to overcome has to do with regular index construction. Most indexes — like the S&P 500 — use market-cap as the main way to rank stocks. The bigger the market-cap, the more weight a stock will have in an index. The problem is that larger firms have more pull on the index than smaller ones — meaning that potentially overbought, slower-moving stocks overshadow faster-growing and cheaper ones. Equal-weighting an index basically gives each stock the same percentage of assets.

The proof is in the pudding. The Guggenheim S&P 500 Equal Weight ETF (RSP A-) has managed to crush the regular S&P 500 over its history. With that in mind, Guggenheim has a whole suite of sector, index and market-cap sizes that use the equal-weight strategy.

The newly launched Guggenheim S&P 100 Equal Weight ETF (OEW C) completes the market-cap puzzle.

OEW will focus and equal-weight stocks in the S&P 100. That’s the hundred largest stocks by market-cap in the United States. Essentially, it’s the largest stocks in the S&P 500. The so-called mega-caps are perceived to be some of the safest companies around, thanks to their size. They often outperform in periods of duress. You know, such as a geo-political event surrounding a nation leaving the European Union. So the timing couldn’t be better for the launch.

The new ETF will charge just 0.40% in expenses.

Both the iShares and Guggenheim launches should prove to be successful. Both build on existing suites of successful funds and offer a new twist and expansion of those suites. Investors are getting valuable additions to help build out their portfolios in these areas.