ESG ETFs Earning their Extra Fees

Are ESG ETFs Earning their Extra Fees?

ESG investing goes in and out of fashion. In 2020, ESG equities were outperforming and in 2022, they were lagging behind. The same can apply for quarterly periods. ULTUMUS data analysis shows selected ESG ETFs outperformed in the fourth quarter of 2023, but have underperformed in the first four months of 2024. 

We use our data to select ten of the largest US-listed ESG ETFs, which have assets of between about $1.2 billion and $12.4 billion USD, as shown below. All are run by ETF giants: Blackrock’s iShares, Vanguard and State Street Global Advisors, which are the largest three providers by assets. Interestingly, two are run by NuShares, which is part of Nuveen, and does not even feature in our ranking of the top 25 providers, which appears in the ULTUMUS flow report. It seems that NuShares has carved out a niche in ESG that lets it compete with the giants, perhaps because it is offering growth and value style ETFs whereas the others do not follow a particular factor style of investing.

In the wider scheme of things ESG ETFs are still fairly small. None of these ten ETFs would come close to our top ten ETF ranking in general where the largest ETF, SPY, now has a market capitalization over 500 billion USD, or 40 times bigger than the largest ESG ETF.

The relatively small size of the ESG ETFs  in itself does not necessarily make them expensive to run, since ETF operations have reached a level of efficiency where some very small ETFs, running tens of millions of dollars, can still have very low cost ratios.

The ESG ETFs are however relatively expensive versus traditional passive US equity index tracker equity ETFs, with ongoing charge ratios ranging from 0.09% for one Vanguard product, to 0.35% for the two Nuveen products.

If the jury is still out on whether ESG investing outperforms, it is clear that over time, these extra costs will eat into returns. This could be an argument against the current suite of ESG ETFs, if the motivation is getting better returns.

Ethical motives

Equally, investors may also have ethical reasons for wanting to invest in an ESG ETF. Individual investors may want to avoid the “sin sectors” – while some pension funds, charities, endowments and foundations, may be required to avoid them due to their ESG policies. 

Active ownership and voting

A more nuanced area is that investors may also want to be confident that ETF managers are voting proxies (shareholder voting at annual general meetings and other meetings) and engaging with companies according to ESG principles.

When it comes to active ownership, there may not in fact be a difference between ESG and non-ESG ETFs. Some asset managers of non-ESG ETFs may still have a company-wide ESG policy that feeds into their proxy voting and engagement across all sorts of products. This is an area that investors can research, and some managers will even publish their proxy voting record online.