There are now over 100 Environmental, social and governance (ESG) ETFs products on the market, which have collected more than $30 billion in investment assets. In a previous blog post, we looked at broadly diversified ESG ETFs. This time we highlight two “nice” product ideas within the ESG ETF space.
Specialized website www.etf.com sorted through the ESG ETFs with fewer than $100 million in assets under management as of the end of May 2020 and pulled out two interesting niche ideas within the ESG ETF universe.
Idea #1: Divest from Authoritarianism with the Freedom 100 Emerging Market ETF (FRDM)
Emerging markets offer investors growth potential and diversification, but also an ethical quandary: how do you invest in developing economies without also funding authoritarian regimes?
The vast majority of emerging market ETFs continue to invest significant amounts of cash into the same problematic countries which crack down on their citizens' freedoms.
The Freedom 100 Emerging Market ETF (FRDM) offers an alternative approach that's unique among emerging market ETFs.
FRDM weights countries by their freedom levels through 79 separate metrics, touching on everything from a country's capital market structure and freedoms of its press to the extent of human trafficking within the country's borders. The top 10 freest countries are selected, and the top 10 largest, non-state-owned equities from those countries are included in the fund's index.
The list of country and their weights as of end of July 2020 is exhibited below (source: www.etf.com)
The Fund is up roughly 9% since launch (August 2019).
FRDM performance since launch (source: www.etf.com)
Idea #2: The Change Finance U.S. Large Cap Fossil Fuel Free ETF (CHGX), the ETF for true ESG believers
One of ESG ETFs' most well-deserved criticisms, especially the broad market funds, is the issue of "greenwashing".
For example, many issuers have language in their funds' prospectuses about not investing in companies experiencing "severe business controversies," only to then include companies like Facebook (FB) or Amazon (AMZN) in their portfolios, two stocks which are not exempted from social issues (e.g privacy scandal, labor rights, etc.)
The Change Finance U.S. Large Cap Fossil Fuel Free ETF (CHGX) is probably one of, if not the, most stringent ESG ETFs left on the market.
CHGX is one of the few ESG U.S. equity ETFs where you won't find Tesla (TSLA), for example, or Facebook, Amazon, Exxon (XOM), McDonalds (MCD) or Uber (UBER)—or any other company that has had significant labor, privacy or environmental controversies in its recent past.
Indeed, CHGX divests entirely from problematic stocks and sectors.
The sector exposure is shown below (source: www.etf.com):
The Fund is up roughly 8% since launch (August 2019).
CHGX performance since launch (source: www.etf.com)