ETFs
Can the Vanguard ESG US Stock ETF be your only stock holding?
An increasingly important investment criterion that many investors consider when determining which stocks to buy involves ESG, or a company’s environmental, social and governance rating. More and more investors want to do good while making money and also want to avoid companies that do things that the general public might consider problematic (at least regarding the environment, various social issues and/or corporate governance policies).
THE Vanguard ESG US Equity ETF (NYSEMKT: ESGV) was created to meet this increasingly important criterion. When evaluating its overall performance, the exchange-traded fund (ETF) appears to have the makings of a good core stock portfolio. Here’s why.
What does the Vanguard ESG US Stock ETF do?
The Vanguard ESG US Stock ETF is, like most ETFs, just an index investment. The index here is FTSE US All Cap Choice Index. The key factors of this index are that it avoids companies involved in “adult entertainment, alcohol, tobacco, cannabis, gambling, chemical and biological weapons, cluster munitions, antipersonnel landmines, nuclear weapons, conventional military weapons, civilian firearms, nuclear energy and coal, oil or gas. In addition, it “excludes actions of companies that do not meet certain labor, human rights, environmental and anti-corruption standards” and companies that “do not meet certain diversity criteria”.
Image source: Getty Images.
For an ESG-focused company exchange traded fund these are essentially decisions you would expect. Beyond that, the ETF is weighted by market cap, so the largest stocks represent the largest percentage of the fund’s assets. And it has an expense ratio of 0.09%, which is pretty low for a pooled investment product. This is where things start to get a little more interesting.
How has the Vanguard ESG US Stock ETF performed?
The main point of comparison for most broad-based ETFs will be the S&P 500 Index. The Vanguard ESG US Stock ETF has actually performed quite well relative to the S&P, running essentially neck and neck with that benchmark over the past five years. The Vanguard ESG US Stock ETF has only been around since late 2018, so five years is the longest standardized time frame you can really compare.
ESGV Chart
For ESG-focused investors, this is an impressive result. This is because you can follow the market without having to give up much upside potential due to ESG-influenced exclusions. The key here is that the Vanguard ESG US Stock ETF has over 1,400 stocks. To give some perspective, Vanguard Total Stock Market ETF (NYSEMKT: VTI) has over 3,700 stocks while the S&P 500, as the name suggests, has around 500.
So the Vanguard ESG US Stock ETF screens a lot of stocks, but it makes up for that by still holding a huge number of them relative to the S&P 500. And that means it offers huge diversification despite the ESG focus. This is likely what allowed the ETF to keep pace with the more focused S&P 500. This is also what investors looking to simply own ESG stocks should want to see.
Probably not perfect, but still very good
Regardless of the rote index approach to something as complex as ESG investing, it’s likely that some companies will fall through the cracks. But it’s a nuanced investing niche and it’s hard to please everyone. If you want to take your investing approach in an ESG direction without having to do the hard work of picking all your own stocks, the performance of the Vanguard ESG US Stock ETF suggests it might be just what you’re looking for. Perfect? Maybe not. But diversification seems to have taken this ETF very far.
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Can the Vanguard ESG US Stock ETF be your only stock holding? was originally published by The Motley Fool