META - ESGV: An Ethical ETF Outperforming In 2023

2023-12-21 07:30:17 ET

Summary

• Vanguard ESG U.S. Stock ETF follows an environmental, social, and corporate governance (“ESG”) approach.
• The sector breakdown is close to the S&P 500 index, but valuation and growth metrics are slightly inferior.
• While ESGV has performed similarly to the S&P 500 since its inception, it has outperformed the benchmark and its competitors in 2023.

ESGV strategy

Vanguard ESG U.S. Stock ETF (ESGV) is a passively managed ETF launched on 09/18/2018 tracking the FTSE US All Cap Choice Index. It implements an environmental, social, and corporate governance ("ESG") investing approach. It has 1468 holdings, a distribution yield of 1.30% and a total expense ratio of 0.09%. Distributions are paid quarterly.

As described by FTSE Russell, the underlying index starts from the FTSE USA All Cap Index and excludes:

companies involved in Vice Products (Adult Entertainment, Alcohol, Gambling, Tobacco), Non-Renewable Energy (Nuclear Power, Fossil Fuels), and Weapons (Civilian Firearms, Controversial Military Weapons, Conventional Military Weapons). Companies are also excluded based on Controversial Conduct and Diversity practices.

The prospectus by Vanguard adds that criteria leading to exclusion, for example the threshold of revenue earned from banned activities, may vary from one activity or industry to another.

The portfolio turnover rate in the most recent fiscal year was 7%, which is very low.

ESGV portfolio

The fund is almost exclusively invested in US companies (about 99% of asset value), mostly in large caps (73%). The sector breakdown is close to the S&P 500 index, represented in the next chart by SPDR S&P 500 ETF ( SPY ). The heaviest sector is technology with 32% of assets (vs. 29.1% in SPY). ESGV almost ignores utilities (0.2%) and energy (0.01%).

ESGV is slightly more expensive than the S&P 500 regarding valuations and shows a lower cash flow growth, as reported below.

The next table lists the top 10 issuers with fundamental ratios. They represent 32.9% of assets. For convenience, the two share series of Alphabet Inc ( GOOGL , GOOG ) have been grouped. Apple and Microsoft have weights about 7%, like in the S&P 500. Risks related to other individual companies are low to moderate.

Historical performance

Since inception, the differences with the S&P 500 ( SP500 ) in performance and risk metrics are immaterial: 28 bps in annualized return, 6 bps in maximum drawdown and 84 bps in standard deviation of monthly return ("volatility" in the next table).

Data and calculation: Portfolio123

However, ESGV has outperformed the benchmark by over 6% in 2023 to date:

ESGV vs. competitors

The next table compares characteristics of ESGV and four other ESG ETFs:

• iShares ESG Aware MSCI USA ETF ( ESGU )
• iShares MSCI KLD 400 Social ETF ( DSI )
• SPDR S&P 500 ESG ETF ( EFIV )
• Nuveen ESG Mid-Cap Growth ETF ( NUMG )

ESGV has the cheapest expense ratio, and it is in second position for size (measured in assets under management) and liquidity (in dollar volume).

It has underperformed other large cap ESG ETFs regarding the 3-year total return, as reported on the next chart. The mid-cap fund NUMG has been lagging, mostly due to underperformance of its size segment in this period.

ESGV is ahead of the competition in 2023 to date:

Takeaway

Vanguard ESG U.S. Stock ETF implements an environmental, social, and corporate governance ("ESG") approach in a stock universe including US-listed companies of all sizes. The sector breakdown is quite close to the S&P 500 index, except it almost ignores utilities and energy. Valuation and growth metrics are slightly inferior to the benchmark. ESGV is almost on-par with the S&P 500 regarding performance since its inception, and it has lagged large-cap ESG funds in the last 3 years. However, it has outperformed the benchmark and competitors in 2023. ESGV looks a good alternative to broad market ETFs for passive investors willing to include ethical principles in their strategy without sacrificing performance or taking more risks. However, keep in mind, ESGV is even more concentrated in technology than the S&P 500.

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