Building a better portfolio with ESG ETFs

Investors and financial advisers are very likely to have ETFs in their investment portfolios. They serve as an investment similar to stocks as the value fluctuates each day. Exchange-traded funds tend to hold stocks, bonds, commodities and even currencies. This more liquid investment is a must-have for many investors, but in recent months ESG ETFs have gained more interest. ESG ETFs contain investments related to solving social issues in the country, such as racial disparities and better health care. They are also in support of ways the environment can be restored and the improvement of the corporate world.

The growth of ESG ETFs has been rapid but they serve as a good long-term investment. There are several advantages to having ESG ETFs as a part of your investment portfolio.

THE RAPID GROWTH OF ESG ETFS

ETFGI, an independent research and consultancy firm, reported that ESG ETFs saw their global assets more than triple in 2020. Assets hit a record level of more than $227 billion and continue to grow. This form of investment has been the trending method that investors and financial advisors have had their eyes on.

ETFs are multiple investments within one fund. Therefore, ESG ETFs could be a group of stocks from sustainable companies, sustainable commodities and more. Your investment portfolio can be much more diversified while investing in ETFs that interest you. There are currently more than 28 distinct impact investing ETFs that trade in the United States. Some funds have billions in assets and have achieved this in a short amount of time.

Some ETFs have dozens, if not hundreds of holdings, within their investment funds.

ESG ETFS PUSH MORAL AGENDAS

Being that these ESG ETFs focus on environmental, social and corporate governance affairs, they must operate at a certain standard. One of the largest ESG funds, the Vanguard ESG International Stock ETF, excludes any company that doesn't meet the standards of the United Nations. Even companies that don't meet diversification standards overall can't be a part of the fund.

[More: Vanguard’s efforts to navigate politics of ESG could be blueprint for others]

THREE ESG FUNDS TO CONSIDER

While ESG ETFs are continuing to emerge, there are a few out there that have already experienced growth and are worth considering investing in.

First Trust NASDAQ Clean Edge Green Energy Index Fund

While some ESG funds are fairly new, this index fund has been around since 2007. Ten of its 53 holdings account for half of its global assets. The fund’s top priority are investments involving clean energy, and its two biggest holdings happen to be the top electric car manufacturers in the world, Nio and Tesla.

iShares ESG US Aggregate Bond ETF

This ESG ETF, while it was established just under three years ago, has made an enormous effort to attract assets. Its assets are totaling well over $1 billion, with roughly 3,400 holdings within the fund. U.S. Treasury bonds are its biggest holding, along with other investments such as mortgage-backed securities and corporate bonds.

Nuveen ESG Small-Cap Fund

This ETF has been around since late 2016, accumulating a portfolio of 673 stocks that gets replaced every couple of years. The purpose of the fund ETF is to create more awareness of smaller companies, with the companies in the portfolio are sectors including financials, industrials and health care. However, the fund does not invest in companies involved in the production or sale of alcohol, firearms, or nuclear power, or even those promoting gambling.

Advisers can assist their clients on what ESG ETFs may be most suitable for them. Their knowledge about the different funds can give clients the help they need to choose an ESG ETF that's aligned with issues they care about.

Lyle Solomon serves as a principal attorney for Oak View Law Group in California.