Sustainable Investing with the iShares ESG ETF Portfolios

Sustainable Investing with the iShares ESG ETF Portfolios

  • Post author:
  • Post category:Sexy Info

One of the most important trends in etf investing these days is the growing popularity of one fund solutions which make it easier than ever to build a low-cost diversified portfolio that requires almost no maintenance and a second trend is sustainable, investing which favors companies that are committed To environmental and social responsibility and to good governance, i’m justin bender portfolio manager at pwl capital in this episode of the canadian portfolio manager i’ll explain,

how a new family of ishares etfs has combined these two key trends in a way that allows canadians to build esg Portfolios with a single trade, so-called esg, investing isn’t just about feeling good. In a recent letter to investors, blackrock’s ceo larry fink made the case that sustainable investment options have the potential to offer clients better outcomes. In september 2020 blackrock, the parent company of ishares etfs introduced a new family of products that aims to do just that. Until recently, one of the major obstacles to esg investing was building and maintaining a globally diversified portfolio. Sure you can cobble together a portfolio using several etfs, but there’s a long list of choices and making an informed decision requires a lot of research and as with any portfolio, esg or otherwise. A lot of moving parts can be difficult to manage these new eyeshares etfs are designed to solve these problems. They’Re modeled after the ishares core asset allocation etfs, which first appeared in 2018

There are four new esg portfolios to choose from with options for 40, 60, 80 and 100 stocks. If you’re already familiar with popular funds such as xbal and x-gro, you won’t be surprised by the ticket symbol of the esg versions, which simply substitute a g for the x. The esg portfolios have a management fee of 0.22 percent, which should work out to an mer of about 0.25. Once you factor in the taxes, that’s a little higher than the original asset allocation etfs, which have an mer of 0.2. But just as you expect to pay a little bit more for organic produce, you’re probably willing to pay a few extra basis points for a well-designed esg portfolio. Of course, before you embrace any investment strategy, you need to understand the methodology for selecting the stocks and bonds in the portfolio. This is especially true with any esg strategy, because there are many criteria for including and excluding companies, so you want to make sure these reflect your own ideas about sustainability. Each of the ishares esg portfolios includes three underlying equity etfs, one each for canadian. U

S and international companies. These three etfs follow a family of benchmarks, known as the msci choice. Esg screened indexes, the methodology is complicated, but here are the main ideas: the indexes start with a broad universe of stocks, and then they apply a series of screens or filters that remove companies with poor ratings on environmental, social and governance issues. Only companies, rated triple, b or higher are included. The indexes also exclude companies that have been involved in controversies, which might include toxic spills, human rights violations or corrupt directors. Finally, the indexes remove all companies involved in controversial business activities, including nuclear weapons, civilian firearms, adult entertainment, alcohol, tobacco gambling, for-profit prisons and predatory lending. By now, you might have noticed a perennial issue that comes up with esg. Investing the methodology used to include and exclude companies might not correspond to your own values, but unless you want to start buying individual stocks, the only practical solution is to find an esg index that most closely reflects your own priorities. So take some time to reflect on whether the ishares esg portfolios are right for you, for example, landmines and oil spills are pretty uncontroversial, but if you enjoy an occasional beer with friends or a glass of wine with dinner, you might not place alcohol in that same Category, the msci indexes also exclude companies involved in nuclear power and genetically modified organisms. Two environmental issues that have proponents on both sides. Of course, climate change, is also an important consideration. Many investors are looking to exclude all fossil fuel companies from their portfolio. The msci choice. Esg screened indexes, don’t automatically do this, they may include a company if it derives at least half of its revenue from renewable energy or alternative fuels. However, the msci methodology has so far been very effective at removing fossil fuels. The ishares core asset allocation etfs have about 4.5 percent of their equity holdings in the energy sector compared with zero percent in the new esg portfolios. The screens also result in significantly lower allocations to the utilities and healthcare sectors compared with the broad market and, as you would expect, other sectors get additional weight. Financial companies make up 21 of the esg equity portfolios and information technology gets about 24. The screening process in these indexes is extensive and the vast majority of companies are excluded. As of september 30th, the ishares core asset allocation etfs held 8909 individual stocks, while the esg portfolios whittled that number down to just 966

[, Music, ], okay, now it’s time to look at the asset allocation of the ishares esg funds and we’ll start by looking at the equity side like the core asset allocation etfs, the esg portfolios include canadian u.s and international equities, but the breakdown is a little different. The big change is that the esg portfolios completely exclude emerging market stocks which make up about five percent of the core asset allocation etfs to compensate the esg portfolios include an additional five percent allocated to canadian stocks, so the overall mix is 30, canadian, 45 percent u.s And 25 percent international developed equities. Now, let’s look at the fixed income side. A traditional broad market bond index fund includes both government and corporate bonds. The core asset allocation etfs, for example, allocate about two-thirds to government bonds and about one-third to corporates. Well, the esg portfolios. Take a very different approach: allocating 100 of the fixed income to government bonds. They also focus on bonds with the highest credit ratings about 95 of the issuers, and the esg portfolios have a credit rating of aaa or double a compared with only about 63. In the core portfolios. The primary fixed income holdings are two i-shares etfs that hold ladders. Of canadian government bonds, clf includes government bonds with maturities of one to five years, while clg maintains a 10-year ladder. These two etfs make up 90 of the fixed income and the other 10 is allocated to long-term. U

S, treasury bonds. Overall, the bonds in the esg portfolios have a shorter average maturity and a lower duration than those in the core asset allocation. Etfs, lower duration means the bond portfolio is less sensitive to changes in interest rates. All of this means the bonds in the ishares esg portfolios have significantly lower risk than a broad market bond index fund. Now. Lower volatility is a good thing, but investors should also expect correspondingly lower returns compared with a portfolio that included corporate bonds and bonds. With longer maturities, [, Music ]. Finally, let’s answer the question: you’ve been waiting to ask all along: can the new ishares esg asset allocation etfs be expected to deliver similar performance to the more traditional core portfolios? After all, if you’re interested in sustainable investing that doesn’t necessarily mean you’re willing to accept dramatically lower returns. Indeed, you might even expect that sustainable companies will deliver better performance over the long term. Of course, we can never know how these esg portfolios will perform in the future and, unfortunately, back-tested data on the msci choice. Esg, screened indexes only goes back to june 2013, so we’re only able to compare a little more than seven years of past performance, but over this time period at least the esg indexes outperformed, the more traditional core indexes, not surprisingly, that outperformance was particularly strong on the Equity side, so the more aggressive the portfolio, the greater the outperformance as you can see, the all equity index track by geqt outperformed, the xeqt index by an average of 3.75 percent per year. Of course, whenever we see significant outperformance like this, we need to scratch the surface and find out where it’s coming from. In this case, the explanation is simple: remember, esg equity indexes, overweight technology stocks and underweight energy, and over the period we looked at canadian tech stocks had an annualized return of 25.6 percent, while canadian energy stocks had an annualized loss of 14.2, that’s a difference of almost 40 percent annually, clearly not every period, is going to see these two sectors diverge so sharply to give some context if we extend our measurement period back 20 years, canadian tech stocks return just 3 percent annualized, while energy stocks returned 0.4 percent for a difference of 2

6 percent – that’s significant, but it’s an awful lot smaller than 40 [ Music ]. So what’s the bottom line on the new ishares esg portfolios? For starters, if you prefer to invest with an eye to sustainability, this family of asset allocation etfs offers a simple and low-cost way to build a relatively well-diversified portfolio without any heavy lifting. However, if you embrace esg investing this way, you’ll need to be comfortable with the possibility of underperforming, a more traditional indexing strategy, certainly over the short term and potentially over the very long term as well. During the last several years, the strategy used by the ishares esg portfolios outperformed the broad market, but that won’t always be the case, so you’ll need to be prepared to stick with the strategy, even when it’s lagging. If you understand these caveats and you’re comfortable with the methodology used to select and exclude specific companies, the ishares esg portfolios should allow you to feel more comfortable about your investment choices. I’M justin bender of pwl capital and if you enjoyed this video, please feel free to subscribe to the canadian portfolio manager youtube channel and, if you’re, looking for more useful, investing tips check out the canadian portfolio manager, podcast and the canadian portfolio manager blog see you next Time,

Read More: Too Embarrassed To Ask: what is ESG investing?

As found on YouTube