3 ESG funds to complete your investment portfolio


AIt turns out that investing for good can also pay off. This is the story behind the skyrocketing ESG investment in recent years. Investors are flocking to ESG (environmental, social and governance) funds in particular, pouring net $ 97 billion into ESG ETFs and triggering the launch of some 200 new ESG ETFs in 2020 alone.

Why have ESG funds become so popular? During market contractions in 2018 and 2020, companies with a strong ESG track record have shown greater resilience than their non-ESG peers. Better yet, this resilience doesn’t come at the expense of performance in the good times. For a broader comparison, the S&P 500 ESG Index outperformed the norm S&P 500 Index during the last one-year, three-year and five-year periods.

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Going forward, ESG investors could also get a helping hand from the federal government with government contracts going into clean energy companies. That’s because the Biden administration has a major initiative on climate change on its to-do list. All of this means that the time may have come to complement your portfolio with greater ESG exposure in different asset classes.

1. For large cap ESG stocks

The Fidelity U.S. Sustainability Index Fund (NASDAQMUTFUND: FITL.X) is a large blended fund, which means its portfolio is focused on the largest public companies and offers a mix of growth and value stocks.

While all stocks exhibit some volatility, large US companies are generally more stable in price and performance than smaller or international companies. For this reason, a large, mixed, diversified fund – ESG or otherwise – can function well as the core of your equity holdings.

FITL.X tracks the performance of the MSCI USA ESG Index, which includes companies showing strong ESG performance relative to their industry peers. The fund holds 290 positions with a 27% concentration in information technology. You will recognize all the top 10 headlines, which include Microsoft, Alphabet, Johnson & johnson, You’re here, and Supervisor & Gamble.

FITL.X has net assets of $ 644 million and an expense ratio of 0.11%. The average annual returns of the fund between 2018 and 2020 were 14.72%, while the benchmark returned 14.88%, and the overall Large Blends category increased by 11.89%.

2. For emerging market ESG equities

Emerging markets are countries that invest in industrialization and production capacity. They tend to grow much faster than developed markets, but they can also be more volatile. In general, emerging market economies are less resilient to global economic downturns as well as social or political instability in their countries.

You could invest part of your portfolio in emerging markets to diversify outside of the United States and take advantage of the growth opportunity. But this strategy is not for the faint of heart. A look at the history of the MSCI Emerging Markets Index shows you why. The index rose over 18% in 2017, 2019 and 2020, but it fell over 14% in 2015 and 2018. How much of these year-to-year fluctuations you can handle depends on you, although many investors cap their exposure to emerging markets at a maximum of 10% of the portfolio.

Calvert Emerging Markets Equity Fund (NASDAQMUTFUND: CVMI.X) invests in emerging market companies with a strong track record in sustainability. According to the fund’s documentation, the fund’s positions hold 100% lower fossil fuel reserves and have 94% lower carbon emissions compared to the MSCI Emerging Markets Index. CVMI.X has a fairly small portfolio of just 55 stocks, mostly weighted in the information technology and consumer discretionary sectors. Net assets are $ 4.1 billion and the fund’s net expense ratio is 0.99%. Five-year annual returns are just under 15%.

3. For corporate bonds

If you are young, you might be fully invested in stocks and equity funds. As you get older, it is best to transfer some of your wealth to fixed income positions for more stability. US Treasury debt is often the preferred choice in this asset class because it presents very low risk. But of course, low risk goes hand in hand with low return. Ten-year Treasury rates have been below 2% since the second half of 2019 and have been below 1% for most of 2020.

Corporate bonds are an alternative. They carry more risk than Treasury debt, but pay higher returns. A corporate bond fund also offers another opportunity to support companies with sustainable business practices.

ETF iShares ESG Aware 1-5 Year USD Corporate Bond (NASDAQ: SUSB), for example, holds investment grade short-term corporate bonds issued by companies with a positive ESG track record. Major issuers include Morgan stanley, Microsoft, Bank of America, and American Express. The fund has net assets of $ 549 million and an expense ratio of 0.12%. Its three-year average return is 4.23%.

Your ESG investment portfolio

The ESG story is compelling, especially if sustainability is important to you. But the decision to increase your ESG exposure remains an investment decision that requires the usual level of due diligence. Read the fund’s documentation, understand the investment approach, check the background of the fund and its manager, and keep an eye on these charges. You want to support businesses that make a positive impact around the world, but you should expect financial benefit in return.

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Suzanne Frey, an executive at Alphabet, is a member of the board of directors of The Motley Fool. Teresa Kersten, an employee of LinkedIn, a subsidiary of Microsoft, is a member of the board of directors of The Motley Fool. Catherine Brock owns shares of Johnson & Johnson, Microsoft and Procter & Gamble. The Motley Fool owns shares and recommends Alphabet (A shares), Alphabet (C shares), Microsoft and Tesla. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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