Are broad-based ESG ETFs closet trackers?

Some broad-based ESG ETFs are highly correlated to traditional indices

Tom Eckett


The underlying holdings of some broad-based ESG ETFs are very similar to traditional benchmarks such as the MSCI World or S&P 500 leading to questions around whether these strategies will provide investors with the desired sustainable impact and if the higher fees attached are justified.

Recent analysis from former AQR Capital Management research head Aaron Brown for Bloomberg showed the Vanguard ESG US Stock ETF (ESGV) – which tracks the FTSE US All Cap Choice index – has a 0.9974 correlation to the S&P 500 since launching in September 2018

A look at ESGV’s top holdings shows why. It has a 3.63% weighting to Alphabet, a 5.25% weighting to Microsoft and a 3.91% weighting to Amazon. Meanwhile, the Invesco S&P 500 UCITS ETF (SPXP) has an almost identical 3.71%, 5.44% and 4.09% weighting to the same companies.

However, it is not just ESGV that is mirroring a cheaper traditional index. In Europe, many ETF issuers offer exposure to versions of MSCI’s ESG universal index series such as the Amundi MSCI USA ESG Universal Select UCITS ETF (SBIU) which tracks the MSCI USA ESG Universal Screened index.

Through a light exclusions filter, the index currently removes 39 companies from its parent benchmark, the MSCI USA, however, many of the same names such as Microsoft, Apple, Amazon Google and Facebook are all in the top holdings.

And while just 39 companies are dropped from the 620-strong parent index, SBIU charges 0.15%, 10 basis points more than the S&P 500-tracking SPXP.

While the focus on fees is important, the bigger question is whether these small adjustments to the parent index justify the ESG label ETFs like SBIU have.

There is clearly for broad-based ESG ETFs as highlighted by the increasing number of investors switching their core holdings to ESG, however, it is important sustainable investing does not simply become a box-ticking exercise.

Claims of greenwashing have long been thrown at the asset management industry and ESG ETFs that do little from a sustainable perspective run the risk of causing reputational damage to the space.

This is why ETF issuers have a responsibility to bring to market strategies that have a genuine impact and investors vote with their assets by avoiding the products that simply deliver the returns of the MSCI World or S&P 500 but have ESG on the label.

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