Head-to-head: iShares S&P 500 vs. iShares US ESG

ETFs have become one of the fastest growing and most innovative categories in the investment industry. Since 2003, the sector has achieved a compound annual growth rate of 24% to reach $12 trillion, and the proliferation of active ETFs has led to major market participants such as JPMorgan Asset Management (JPMAM) We predict that assets under management will reach $20 trillion by the end of the year.

One obvious attraction for investors is cost. Management fees are typically much lower than those charged by Ucits, and some investors also receive tax benefits due to their geographic location. Increased ownership transparency through daily disclosure is an added attraction that gives active ETFs an advantage over actively managed mutual funds.

While equity strategies still account for the majority of all ETFs (about 75%), fixed income ETFs are rapidly increasing inflows, accounting for more than 40% of inflows last year, according to JPMAM.

However, passive equity strategies remain a cornerstone of the industry, and BlackRock’s stablemate iShare is a leader in this sector and perhaps the most well-known name for retail investors.

this week, Monica Caray, Director of Passive Strategies Research at Morningstar, compares the iShares Core S&P 500 Usits ETF and the iShares MSCIUSA ESG Screening Usits ETF.

investment approach

The iShares Core S&P 500 ETF seeks to track the S&P 500 index, which includes the 500 largest companies in the United States. Membership is determined by the committee.

The iShares MSCI USA ESG Screened ETF, on the other hand, tracks the MSCI USA ESG Screened index. Exclude companies involved in controversial industries such as weapons, tobacco, and fossil fuels, and exclude companies with very low or deeply controversial ESG scores.

“There is no explicit ESG review for the S&P 500 ETFs. Because of the need to incorporate positive returns, there is a slight quality tilt to the index,” Caray said.

ESG Screening ETFs exclude companies with high ESG risks and involvement in controversial businesses, and have a higher ESG focus than S&P 500 ETFs. However, this screening excludes only about 50 to 60 companies from the index, MSCI USA.

Both ETFs hold approximately 500 stocks. Additionally, both companies have similar sector allocations, as ESG reviews only change the composition of the portfolio slightly, Caray said.

As of March 12, 2023, the ESG Screening ETF has slightly more exposure to IT (33.67% vs. 31.19%) and slightly less exposure to Energy (1.99% vs. 3.77%) than the S&P 500 ETF. ).

“Despite minor exclusions due to ESG screening, the iShares MSCI USA ESG Screening ETF managed to deliver an improved ESG profile compared to comparable non-ESG strategies,” said Calay. . “Currently, this fund has an average Morningstar Sustainability Rating of 4 stars.”

“Ratings are a measure of how well a fund’s owned companies manage ESG risks and opportunities compared to similar funds, including those that do not have a defined sustainability focus,” he said. ” he said.

“Again, while this screen provides an improved ESG profile, it may not be sufficient for investors looking for further ESG initiatives.”

Fund characteristics

Sector allocation:

Top 10 holdings:

performance

Caray said the iShares Core S&P 500 ETF could have an advantage over ESG-screened ETFs if controversial industries such as tobacco, weapons and fossil fuels outperform the broader market. “ESG ETFs exclude these industries, so they may miss out on strong returns in these industries,” he said.

“Small differences in sector allocation between two ETFs can lead to differences in performance in certain market conditions,” Caray said.

For example, if the energy sector performs well, the iShares Core S&P 500 ETF may have an advantage due to its higher exposure to energy stocks (3.77% vs. 1.99% for the ESG Screening ETF).

“Given the significant overlap in their holdings and exposure to similar sectors, both ETFs are likely to perform similarly in most broad market environments,” Clay said.

Both funds have outperformed their category averages over the past five years and rank in the top quartile of their peer groups.

“We expect the difference in volatility between the two ETFs to be relatively small, given the significant overlap in holdings and sector exposure,” he said.

The iShares MSCI USA ESG Screening ETF has a less stringent ESG screening process than other ESG-focused funds.

Discrete calendar year performance

manager review

Both these funds are managed by the same team.

“iShares has an experienced passive management team worthy of being a leading ETF provider in Europe,” said Kalay.

Our well-resourced EMEA portfolio management team consists of approximately 30 portfolio managers. The team has low turnover and has access to market-leading technology while managing funds.

As standard industry practice, funds are managed on a team basis.

“This is to ensure that a portfolio manager’s absence or departure does not impact day-to-day fund management,” Caray said.

“We assigned the managers of these funds an above-average talent pillar rating.”

Fee

Both funds have ongoing fees of 0.07%. This is significantly lower than the category median fee of 0.9%.

conclusion

Both funds have a Morningstar Medalist Gold rating.

“The U.S. stock market is highly liquid and efficient, which means important information is quickly reflected in stock prices,” Caray said.

“This limits the scope for active managers to add meaningful value, making broadly diversified, low-cost passive strategies the default choice for investors seeking this market exposure,” he concluded. .