So called “ethical investing” or ESG (environment, social, governance) investing has been one of the fastest growing sub-sectors over the last few years. Is this new fund the best way to invest ethically?
The rise of ESG
First of all, what is ESG?
ESG investing means investing in companies that focus on more than just profits. They also focus on the environment, social systems, and good governance. You may have heard this referred to as the “triple-bottom line”, with companies aiming to achieve profits while also minimising environmental damage and promoting social causes.
Over the last few years a whole range of ESG exchange traded funds (ETFs) have popped up on the ASX to cater to those investors who want a return but also want to feel good doing it. The premise is basically that you can invest your spare cash in companies doing good.
The way they work is generally by taking an index, like the ASX 200 or S&P 500, and excluding companies that operate in certain industries. Think weaponry, tobacco, fossil fuels, and sometimes things like alcohol and gambling.
You’re basically getting a “sanitised” version of the index.
What options are there?
The “ethical” ETFs were really spearheaded in Australia by Vanguard and Betashares with ETFs like the Vanguard Ethically Conscious Australian Shares ETF (ASX: VETH) and the Betashares Global Sustainability Leaders ETF (ASX: ETHI).
Both of these ETFs have been around for 3+ years and delivered reasonable returns in that time. ETHI has grown over 11% per year over 3 years and VETH over 6% per year. VETH has a low management fee of 0.16% per year while ETHI is a little on the high side at 0.59%.
While these are both good options to consider, there’s a more recent addition that could be worth a look…
iShares goes ethical
In August 2022 iShares launched the iShares High Growth ESG ETF (ASX: IGRO) and since then it’s been flying under the radar a bit. IGRO gives you global ESG exposure (~80% across the US and Australia) for a very reasonable management fee of 0.22% per year.
Some of the top holdings include big names like Microsoft Corp (NASDAQ: MSFT), NVIDIA Corp (NASDAQ: NVDA), and CSL Ltd (ASX: CSL).
Over the last 12 months it’s delivered over 18% growth including a small dividend. What I like about it is that it’s not as US-heavy as many other similar ETFs, and it has exposure to a wide range of industries including tech, healthcare, consumer discretionary, and finance.
What I’m not so keen on is the size of the fund. Despite being close to two years old, IGRO still only has $8 million of funds under management. That’s a bit of a red flag because if the ETF fails to gain traction and become profitable for iShares, they may shut it down, forcing you to sell at a bad time.
In comparison, ETHI has funds under management of nearly $3 billion. It’s a much more established ETF with a longer track record and looks more secure long-term.
Which would I choose?
If I was trying to pick an ethical ETF, I’d be more inclined to choose ETHI over IGRO. Here’s why.
Yes, the management fee is a bit higher. However, for that higher management fee I’m getting an ETF that is not only better established, but has also (historically) delivered a better return.
I also like that ETHI isn’t invested in Australian companies so it’ll have no overlap if you’re already invested in something like the Betashares Australia 200 ETF (ASX: A200).
It’s great to keep an eye on new ETFs coming into the market because there can be a lot of untapped opportunity there. I wouldn’t avoid investing in an ETF just because it’s new, but when there are other ETFs offering such similar options it’s hard to justify taking the risk.
If you’re interested to learn more about ESG investing, both Betashares and Vanguard have a range of ETFs other than the ones I mentioned that cater to investors with different goals and risk tolerances. To be able to choose the best one for you, make sure to consider what it is you’re trying to achieve (i.e. growth or income, what’s your investment timeframe etc.).
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