SPY - No Meaningful Difference Between ESGU And SPY

Summary

• There are many ETFs out there that really don't need to exist, and ESGU is one of them.
• The mandate here is to invest in large cap and mid cap US stocks with an ESG tilt.
• But almost every large cap stock has made sure that it has a favourable enough ESG profile.
• ESGU ends up having almost the exact same sector and company weightings as the IVV which indexes the SPY, but it charges investors a 5x higher expense ratio.
• The IVV wins every time over ESGU.

The iShares ESG Aware MSCI USA ETF ( ESGU ) is another ETF that probably doesn't warrant existence. It mirrors almost exactly the iShares Core S&P 500 ETF ( IVV ) which indexes the S&P 500 ( SPY ) but charges a meaningfully higher fee on that basis that it somehow adds value in making 'ESG tilted' selections only while maintaining a large cap focus. Very few large caps get excluded on an ESG basis. While investors should have reasons to be optimistic about the markets in 2023, ESGU is a completely inefficient way to play the potential market rally on the end of inflation, and is dominated strictly by the IVV. Do not buy it.

Comparing IVV and ESGU

The ESGU mandate is the following:

1. Obtain exposure to large- and mid-cap U.S. stocks, tilting towards those with favorable environmental, social and governance ( ESG ) ratings.

2. Seek similar risk and return to the MSCI USA Index with a more sustainable outcome.

3. Use to build a sustainable equity portfolio for the long-term.

The ESG characteristics are provided by the index provider, and the idea is to reject holding stocks that don't meet their pretty low threshold. You can tell that the threshold is low because of the almost identical sector exposures, and the almost identical top holdings in what ends up being an almost mirrored value-weighted exposure of the US stock markets .

Its exposures are 26% and 25% for the ESGU and the IVV, respectively, healthcare are both 16%, financials 11% and 12%, respectively, and so on. Differentials never appear to be more than 1% when rounding.

The top holdings also end up being very similar.

Apple ( AAPL ) is 6%, Microsoft ( MSFT ) is 5% and so on. The only difference we notice is the exclusion of Berkshire Hathaway (BRK.A) ( BRK.B ) in ESGU, and the inclusion instead of both classes of Alphabet ( GOOG ) (GOOGL). Besides that there are only slight differences in the order. Exxon Mobil ( XOM ) somehow makes the ESG list, as does Coca-Cola ( KO ) where the former is a major oil company and the latter produces products that in many international jurisdictions are sin-taxed for their sugar content. Seems an odd set of choices for an ESG oriented portfolio. Moreover, Apple has seen reporting on its supply chain using indentured Uighur labor in China.

Bottom Line

There are reasons to be bullish on markets. Not only are inflation figures easing, but inflation expectation figures seem to be easing too to June 2021 levels, long before very real inflation cropped up from supply chain crimps. On top of that, jobs figures remain strong despite pressures from both high inflation and interest rates. The market is actually quite easy to buy into, and the rallies in some equities are still not across the board.

However, if you're going to a broad index play, ESGU charges you at 0.15% expense ratio where IVV charges 0.03% even though they're basically the same. Everything compounds, including what you're paying the ESGU mandate to manage the slight adjustment to IVV based on index provided ESG data. Best not buy it.

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