Best ESG Mutual Funds and ETFs

Some investors seek returns beyond monetary rewards. Their criteria include investing in companies concerned with positively impacting the environment, offering fair compensation to employees and a board of directors looking out for the interests of customers.

Investors who are concerned about environmental, social and governance (ESG) investing diversify their portfolios by investing in an ESG mutual fund or exchange-traded fund (ETF) while ensuring the company they invested in cares about its stakeholders and the environment. Although numerous companies meet stringent ESG standards, only some provide significant returns while offering low costs. Benzinga explores the five best ESG mutual funds and ETFs. 

Best ESG Mutual Funds and ETFs

• Vanguard FTSE Social Index Fund Admiral Shares Mutual Fund
• iShares Global Clean Energy ETF
• Parnassus Core Equity Fund Mutual Fund
• iShares MSCI USA ESG Select ETF
• Shelton Green Alpha Fund Mutual Fund

The Best ESG Mutual Funds and ETFs

The first thing that ESG investors look for in companies is their level of commitment toward the environment, social justice and governance. Although ESG issues are important to such investors, so are profits. ESG mutual funds and ETFs need to have a history of providing good returns.

High costs for managing funds decrease profits and can result in investors losing money if returns are low. Benzinga picked mutual funds and ETFs that consist of ESG companies with a strong record of profits and low costs.

This is especially important when you’re creating a retirement plan, hoping to supplement your Social Security benefits, start a retirement account, etc.

1. Vanguard FTSE Social Index Fund Admiral Shares Mutual Fund

The Vanguard FTSE Social Index Fund Admiral Shares is a mutual fund that consists of companies with mid- and large-cap market capitalizations. The fund tracks the performance of the FTSE4Good US Select Index and excludes stocks of companies in the alcohol, tobacco and weapons industries. It also excludes companies that violate human and labor rights.

One of the reasons investors find the VFTAX attractive is the low expense ratio of 0.14%. That ratio is one of the lowest in the market because the fund is managed passively. Investors need to contribute at least $3,000 to the fund, which has a 19% three-year trailing return.

The majority of the fund consists of technology companies, and a significant portion is consumer discretionary and healthcare companies. An institutional version of the fund requires a minimum investment of $5 million and offers a 0.12% expense ratio.

2. iShares Global Clean Energy ETF 

iShares Global Clean Energy ETF (NASDAQ: ICLN) is a BlackRock-managed ETF that tracks the S&P Global Clean Energy Index. The fund was launched in 2008 and consists of clean-energy companies mostly in the utilities, technology and industrial sectors.

ICLN has a 0.42% expense ratio and a 10% 10-year trailing return. Its 5-year return is even more impressive — 21%. The fund’s five-year performance beat the S&P 500, but its 10-year performance was worse than the benchmark index. It offers semi-annual distributions.

The fund provided a 141% annual return in 2020, but you should also note that it has a standard deviation of more than 30%, making it highly volatile. 

3. Parnassus Core Equity Fund Mutual Fund

Parnassus Core Equity Fund is a mutual fund that consists of large-cap companies and has more than $27 billion in assets. The fund has a net expense ratio of 0.82% because it’s actively managed, and it requires a minimum investment of $2,000.

PRBLX consists of companies in the information technology, industrial and communication service sectors while avoiding companies that generate most of their revenue from alcohol, weapons and nuclear power. 

The fund’s annual average return for three consecutive years was slightly over 20%. It has a 10-year trailing return of over 14%. The main reasons for the fund’s solid performance are the downside protection while participating in market rallies of an 89% upside capture.

4. iShares MSCI USA ESG Select ETF

iShares MSCI USA ESG Select ETF (NYSEARCA: SUSA) consists of mid- and large-cap U.S. stocks and avoids low-rating ESG companies. It tracks the MSCI USA Extended ESG Select Index. The fund’s biggest investments are in information technology companies such as Microsoft Corp. (NASDAQ: MSFT) and Apple Inc. (NASDAQ: AAPL).

The fund’s expense ratio is 0.25%, and it has provided a 5-year trailing return of just above 15%. Its 10-year trailing return is slightly higher than 13%. The fund provides quarterly distributions and has more than $3.4 billion in net assets.

5. Shelton Green Alpha Fund Mutual Fund

The Shelton Green Alpha Fund (NEXTX) is a mutual fund that invests in companies providing products and services that reduce environmental risks and improve human well-being and increase economic efficiencies.

This mutual fund is suitable for investors who can stomach high volatility and high management costs — 1.16%. In exchange for a high expense ratio, investors received significant returns. The fund provided an average return of 31% in three years, and it’s got a 22% five-year trailing return.

The Shelton Green Alpha Fund was established in March 2013 and has a minimum investment of $1,000.

What is an ESG Mutual Fund or ETF?

ESG mutual funds and ETFs consist of stocks and bonds that consider environmental, social and governance issues. Investors targeting such funds are engaged in socially responsible investing (SRI).

Managers of ESG mutual funds and ETFs invest in companies that surpass stringent ESG standards. They’re companies with a high sustainability score, and fund managers avoid companies practicing poor labor relations and have low standards for pollution and stakeholder engagement.

Although investors of these funds seek investments in companies valuing social and environmental causes, the companies also have to provide significant returns. Several ESG mutual funds and ETFs have outperformed the S&P 500, and some offer a low expense ratio, which is perfect for a retiree.

How do Mutual Funds and ETFs Work?

A mutual fund or ETF is a pool of money gathered from investors. Fund managers use the money collected to buy stocks, bonds and other securities aligned with the fund’s goal. Investing in funds can be passive or active, depending on the retirement income you prefer to generate.

Passive investing is done through index funds and ETFs. The cost associated with these funds is usually low because the manager’s engagement with the fund is minimal. Fund managers are active when they regularly buy and sell securities to outperform the market.

Actively managed funds cost more than passive funds. But investors can make bigger profits because passive investing aims to match the returns of a market index fund such as the S&P 500. Since a mutual fund or ETF consists of numerous companies, it intrinsically diversifies your portfolio.

You can invest in a fund that offers equities, bonds or a mixture of both. For example, some funds consist of companies with only large market capitalizations or international corporations.

What to Look for in ESG Mutual Funds and ETFs

Investors wanting to grow their money in ESG mutual funds and ETFs need to consider several factors to ensure that the equities and bonds they invested in match their values and goals.

Environment: A key aspect that ESG investors look for in a company is its management of environmental impact. They want to know if a company’s products and services adversely affect the environment with air or water pollution.

ESG investing involves concern about a company’s sustainability efforts in the supply chain and its strategies to reduce its carbon footprint. They’re interested in investing in companies free of fossil fuels and ones that use renewable energy sources.

Social: The social aspect that investors seek in ESG funds includes a company’s treatment of people and commitment to labor rights. They want to know that the company fairly compensates its employees and provides equal employment opportunities.

ESG investors care about companies that support local communities and sponsor healthcare, education and housing.

Governance: A company that meets stringent ESG standards has policies that benefit the company’s stakeholders. ESG investors are interested in companies that ensure balanced remuneration between the executives and employees. It’s important to them that a company abides by ethical business practices.

Returns: ESG funds track a market index fund, using it as a benchmark. You should invest in a fund that outperforms the tracked fund. But at the very least, it should match the returns of the tracked index fund. Even if you haven’t reached retirement age, you need to know if this investment opportunity is right for you long before you plan to profit from it.

Costs: Since most ESG mutual funds are passively managed, their costs are low. Some funds have a high expense ratio, so they should have a history of outperforming the market to be profitable investments. Remember, these costs play heavily into your asset allocation efforts.

Compare Online Brokers

Comparing the fees and reliability of online brokers offering ESG investing is challenging. Benzinga has made the selection of the best online brokers easy. You can plan to grow your retirement savings, look for brokers that offer a retirement calculator, perhaps those that allow you to manage your Roth IRA more aggressively or those that help you build a proper investment strategy.

Invest in Mutual Funds and Remain Socially Conscious

Whether you’re part of a retirement system tied to a government organization or saving for retirement on your own, your investment objectives should include ESG principles. When you research these assets properly, work with a portfolio manager and set an attainable retirement goal, you can come back to Benzinga to further research your options. Investment professionals are turning to ESG solutions more and more, and you can use them to supplement your Social Security benefits, diversify your investment funds, learn more about shareholders rights and focus on your retirement journey.

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