Life Just Got Easier (and Cheaper) for Sustainable Investors

Imagine my great joy when I saw this announcement:

Vanguard launches two new ESG index ETFs

Vanguard is an absolute leader in the ETF world, but they sadly didn’t have any sustainability ETFs - until now! They launched two last month:

ESG U.S. Stock ETF (ESGV)

Vanguard ESG International Stock ETF (VSGX)

I have some issues with their approach (you’ll see below), but they are - by a mile - the most diversified and the least expensive sustainability ETFs available today. Together, they make it very easy for investors to ‘do less evil’ with global stocks and now I need to update my Organic Couch Potato model portfolio.

What I like:

They are dirt cheap. ESGV has an expense ratio (ie. annual fee) of 0.12%, while VSGX is a little more expensive at 0.15%. To put this in perspective, lots of sustainability ETFs cost around 0.5% while mutual funds charge about 2.25% in Canada.

They are incredibly diversified with companies large, mid, and small. ESGV has 1,254 companies inside and VSGX has 1,673 companies inside.

They have an expanded negative screen that eliminates fossil fuel companies in addition to the regular ‘sin stocks’ like tobacco, weapons (including all guns), and adult entertainment. It seems to apply just to oil & gas and coal companies, but not to derivative industries like pipelines. I’m also happy to see that it excludes companies with poor diversity standards, since there is a clear correlation between diversity and profitability.

What I don’t like:

These ETFs won’t go far enough for many of my clients (including myself). There are still some companies inside that are a ‘thumbs-down’ for me from an ethical perspective. The most obvious ones are in the International one (VSGX):

Nestle, Enbridge, and Transcanada are all problem companies for me. There are lots more troublesome companies inside the ETFs, and these will vary person to person. My point here is that the methodology ignores major environmental issues like bottled water, fracking, and pipelines that are deal-breakers for me personally. Investors should look through the list of companies to determine if there are any deal-breakers for them.

These ETFs are both traded in US dollars, which is a small headache for Canadian investors. It means they are less tax-optimal inside a TFSA or RESP, and people need to use Norbert’s Gambit in order to avoid the crappy currency exchange rate that you’ll otherwise get dinged by.  

Still, I’m so very happy that these ETFs exist! It provides yet another option for sustainable investors and will hopefully force other ETFs to lower their management fees to compete.

 

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commented 2018-11-09 16:52:50 -0500
The first holding in their new International ESG ETF (VSGX) is just their old non-ESG International ETF (VXUS). So that one actually may be closer to what AZ is looking for.

https://investor.vanguard.com/etf/profile/overview/VSGX/portfolio-holdings

Not for me though, I’m only interested in ETF’s that divest completely from fossil-fuel. So the US one may work, but I doubt it, waiting for it to get screened on fossilfreefunds.org
commented 2018-11-02 17:54:20 -0400
Morningstar also published a critique of the Vanguard ETFs yesterday: https://www.morningstar.com/articles/890151/about-those-new-vanguard-esg-etfs.html
commented 2018-11-02 14:27:56 -0400
Hi Tim,

Thanks for your overview of these ETFs! I have some thoughts to add:

I could not find any statements of these ETFs having a proxy voting policy consistent with ESG principles (whereas all the iShares Sustainable/ESG ETFs do have this: https://www.ishares.com/us/literature/shareholder-letters/proxy-voting-policy-social-index-funds.pdf )

Therefore, if investors want an ESG-specific proxy-voting policy for the shares they hold, iShares ETFs may be a better choice, albeit with slightly higher costs, double the number of ETFs to manage, and less diversification for the international equity holdings.

For U.S. Equity, a combination of iShares MSCI USA ESG Optimized ETF (ESGU, MER of 0.15%, 297 companies) and iShares MSCI USA Small-Cap ESG Optimized ETF (ESML, MER of 0.17%, 921 companies) would achieve the same diversification as ESGV. I found an allocation of 86% ESGU/13% ESML gives a similar market-cap weighting to a “total US-market” ETF such as ITOT.

For International Equity, a combination of iShares MSCI EAFE ESG Optimized ETF (ESGD, MER of 0.20%, 462 companies) and iShares MSCI EM ESG Optimized ETF (ESGE, MER of 0.25%, 311 companies) would achieve around half the total companies as VSGX. An allocation of around 80% ESGD/20% ESGE would achieve the correct market-cap weighting. Also, VSGX has 7% Canadian equity (according to https://etfdb.com/etf/VSGX/), whereas ESGD/ESGE have no Canadian equity, so investors will need to keep this in mind for achieving their desired total portfolio allocation to Canadian equity.

Finally, one other difference with the iShares ETFs is that ESGU/ESML/ESGD/ESGE have less exclusions; their prospectus documents state they only exclude companies involved with tobacco, controversial weapons, civilian firearms, and very severe business controversies. However, the weightings of the remaining companies are adjusted up or down according to their ESG scores. Of course, some people may argue that owning shares of controversial companies while having an ESG-specific proxy voting policy at their shareholder meetings can have greater positive influence than not owning their shares.
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