Market Overview

ESG ETFs Are Growing, But Still Have A Long Way To Go

ESG ETFs Are Growing, But Still Have A Long Way To Go

Data indicate exchange traded funds dedicated to environmental, social and governance (ESG) investing principles are growing in both population and assets under management. However, these funds need more of the latter, not necessarily more new product launches, to chip away at actively managed rivals and cement their status as credible alternatives to traditional investments.

What Happened

Some ESG ETFs are closing in on two decades of trading trading while others are over 10 years old, but the landscape of socially responsible funds has long been dominated by actively managed mutualf funds. Fortunately for ETF issuers, inroads are being made against active rivals.

“ETFs are beginning to reach parity with open-end funds in the ESG space,” said Morningstar in a recent note. “The ETF universe of sustainable funds attracted more than $2 billion in net flows last year, doubling its 2017 total and setting a record for the past decade.”

Why It's Important

The 2016 through 2018 period brought exponential growth in terms of sheer population for the U.S. ESG ETF universe. During that period, 52 ESG ETFs launched in the U.S., according to Morningstar. Rookie ESG ETFs are like any other new ETF: some find immediate success gaining investors' assets while others take time to gain favor among ETF users.

“With these newer ETF options starting to attract flows in 2018, ETFs accounted for about 40% of overall net flows to sustainable funds,” said Morningstar. “In the previous two years, ETFs had accounted for only about 20% of overall net flows to sustainable funds.”

Still, 2018 flows to ESG ETFs were dominated by iShares, the world's largest ETF issuer.

“The 13 iShares ESG ETFs, including three launched during the year, attracted more than $1.5 billion in net flows in 2018, more than two thirds of the overall net flows to the 74 ESG ETFs available in the U.S.,” said Morningstar.

What's Next

The  iShares ESG MSCI USA Small-Cap ETF (CBOE: ESML), which launched last April, has $14.76 million in assets under management while the iShares ESG U.S. Aggregate Bond ETF (NYSE:EAGG) has $56 million in assets after coming to market last October.

Vanguard, the second-largest U.S. ETF sponsor, is also making its presence felt in the ESG ETF race. Last September, the issuer Vanguard ESG U.S. Stock ETF (CBOE: ESGV) and Vanguard ESG International Stock ETF (CBOE: VSGX). At the end of last year, ESGV and VSGX had $110.7 million and $62.7 million in assets under management, respectively.

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