How To Invest in ESG ETFs

Exchange-traded funds (ETFs) are an easy and cheap way to invest in sustainable companies. But with so many options, it can be hard to choose.

SustainFi Updated September 14, 2021

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Here, we’ll review the best ESG ETFs, so you can find the right ones for you.

What is ESG investing?

Environmental, social, and governance (ESG) investing adds factors such as greenhouse gas emissions and corporate governance to the investment process. ESG investing is also known as sustainable, socially responsible, and impact investing.

ESG investing is not just about aligning your financial goals with your values. Studies show that ESG investing can reduce volatility and improve returns. The old perception that you had to sacrifice returns to do good has been largely debunked. In fact, ESG funds did better than the broader market during the stock volatility surrounding the coronavirus pandemic.

🔔 Curious about ESG investing and how it can improve your returns? Read more here.

What are ETFs?

  • Exchange-traded funds (ETFs) allow you to buy many stocks or bonds at once
  • ETFs trade on exchanges like stocks, so you can buy or sell them during market hours
  • The stocks or bonds in an ETF generally track an index. For example, if you buy shares of an ETF that tracks the S&P500, you are buying shares of the 500 companies that the S&P500 tracks. (ESG ETFs track indices that follow companies with sustainable practices)
  • ETFs give you exposure to a set of companies without having to purchase individual stocks, which would be costly and time-consuming
  • You can buy ETFs through a traditional brokerage, or a trading app, such as Public. You can use a taxable investment account or a tax-advantaged IRA. ETFs do not have a minimum amount you need to invest
  • Online robo-advisors such as Acorns will buy and sell ETFs for you for a small annual fee, typically of 0.25-0.50% of the assets you invest

ETFs vs. mutual funds

Both ETFs and mutual funds hold a collection of stocks or bonds, but they are traded differently.

ETFs are easier to buy and sell

  • Unlike mutual funds, ETFs trade on exchanges like stocks. You can buy and sell them through your broker or app during market hours
  • Mutual funds price once a day, and you can buy or sell them through a broker or directly from the issuer. There is a minimum you must invest ($2,500 is common), and sometimes they charge extra fees

ETFs are generally cheaper and more tax-efficient

  • On average, ETFs have lower fees than mutual funds, though there are some exceptions
  • For tax reasons, mutual fund costs are higher than ETF costs. If you invest in mutual funds, higher costs are passed on to you in the form of higher fees. (A mutual fund needs to redeem shares each time an investor sells. The remaining investors must bear the resulting tax liability. ETFs trade through and exchange and do not need to redeem shares each time an investor sells)

ETFs are generally more transparent

  • Most ETF holdings are available daily, so you always know what you own
  • Mutual funds holdings are generally released quarterly or monthly

Despite the advantages of ETFs, there are still many more ESG mutual funds than ETFs. This is particularly true for ESG funds. Mutual funds give you more options. Also, some 401k plans exclusively offer mutual funds.

With mutual funds, you also get the expertise of fund managers who spend time analyzing ESG data. In contrast, passive ESG ETFs use ESG scores from a third party that can vary significantly depending on the provider.

Finally, mutual fund managers can work with the companies to improve ESG-related disclosures or encourage them to set climate goals. On the other hand, passive ETFs are usually sponsored by giant asset managers that don’t typically engage with management teams.

How to evaluate ESG ETFs

Investing in ESG ETFs is one of the easiest and cheapest ways of investing sustainably. However, ESG ETFs are relatively new, and some of the funds are too small and expensive.

What should you look for when choosing an ESG ETF?

Assets under management (AUM)

Assets under management are the total value of the investments an ETF holds, or essentially the size of an ETF. Funds with more assets under management are generally considered lower risk.

ETFs are a competitive market, and some of the smallest ETFs don’t make enough money in fees to survive. Recently, the largest ETFs have been attracting assets, while smaller ETFs have generally been losing capital. Over 80% of ETF assets are now managed by giant asset managers BlackRock (iShares ETFs), Vanguard, and State Street (SPDR ETFs).

No one wants to invest in an ETF that shuts down. You won’t lose your entire investment if an ETF fails, but you may have to jump through time-consuming administrative hoops to get your money back.

You should be careful with smaller ETF managers with less than $100 million in assets. To help you assess an ETF, you can turn to online sources like ETF.com, which estimates the risk of closure for most ETFs using FactSet’s ETF Closure Risk tool. The tool looks at factors such as fund flows, assets, and if the manager has closed other funds.

Expense Ratios

ETFs charge fees – known as expense ratios – to cover administrative expenses. Expense ratios are the cost of owning ETFs. A 0.50% expense ratio will cost you $50 on a $10,000 investment each year and more over the years due to the compounding effect. Fees eat into your returns, and ETFs with lower expense ratios are better, all else being equal.

ESG ETFs are smaller, newer, and more expensive than conventional ETFs, though fees are declining. Some of the biggest ESG ETFs, such as iShares ESG MSCI USA Leaders ETF (SUSL), cost only 0.10%, on par with traditional funds.

Spread

When you buy an ETF, you pay a price higher than the quoted price, and when you sell, it’s at a lower price. The difference between the price at which you buy and the price at which you sell is called the bid-ask spread. When the bid-ask spread is large, it can eat into your return.

Spreads can be helpful when comparing similar ETFs. Bid-ask spread is not an issue for large ETFs that trade a lot, but some ESG ETFs are small and don’t trade much. The bid-ask spread is large and can decrease your gains. Spreads can be helpful when comparing similar ETFs; be wary of spreads greater than 0.10%.

Spreads do not include the brokerage commission you may need to pay. Fortunately, more brokers – such as free investing app Public – are now offering free trading.

Active vs. passive ETFs

Most ETFs are passive, meaning they track an index and replicate its returns. However, recently a few active ETFs have been launched. Active ETFs are managed by a portfolio manager who picks investments, just like most mutual funds.

Active ETFs try to beat their benchmark and charge much higher fees for the potential for more gains. Expense ratios over 0.50% are the norm with active ETFs. For example, Gabelli Love Our Planet & People ETF (LOPP), an active ETF, charges 0.90%, and SmartETFs Sustainable Energy II ETF (SULR) charges 0.79%.

Further, these funds are not transparent, so you may not know their daily holdings.

Historically, passive funds have outperformed actively managed funds after fees, so paying more for an active ETF may not be worth it.

Diversification of the ETF’s holdings

Before buying an ETF, you should understand what the ETF owns and how concentrated its holdings are. Some funds are more diversified than others.

You can start by looking at the top ten holdings. If you are looking for diversified market exposure, an ETF with most of its assets in the top ten holdings is not suitable for you. It will be much more volatile, and you will be buying its top ten or even top five stocks.

Thematic and niche ETFs are less diversified than ETFs that try to replicate the broad market. For most of the largest passive ESG ETFs, the top ten holdings are between 20% and 30% of assets, and they own hundreds of stocks. But there are also ETFs like Global X Lithium & Battery Tech ETF (LIT). LIT has less than 40 investments, and the top ten represent a whopping 60% of assets.

Ownership of fossil fuel and other controversial stocks

Most large passive ESG ETFs that track the market own some fossil fuel companies. They promise to deliver performance similar to the market, which includes energy companies. So they pick “best in class” fossil fuel companies.

Even some ETFs marketed as “fossil fuel reserve free” continue to own oilfield services companies (that do not own oil and gas reserves).

If you want to exclude stocks related to fossil fuels, run the ETF through a screener from Fossil Free Funds.

You can also check ETFs for investments in other types of companies that may not align with your values. The Invest Your Values tool from the nonprofit As You Sow offers ETF screens for deforestation, guns, tobacco, and weapons.

Featured Investing Products

Build custom ESG portfolios for free

Fees

$0

$125 for M1 Plus

Minimum

$100

Open a green bank account

Fees

Pay what you want

Minimum

$0

Save your change and invest in ESG portfolios

Fees

$3-$5

/month

Minimum

$5

Types of ESG ETFs

U.S. stock ETFs

One of the best ways to get started with sustainable investing is to buy an ESG ETF that tracks a portion of the U.S. equity market. For example, the classic “60/40” portfolio recommends a balanced portfolio with 60% of assets allocated to stocks and 40% to bonds. The traditional broad market ETFs or mutual funds that make up 60% of the stock portion can be replaced with an ESG fund.

The largest U.S. equity-focused ESG ETFs track broad market indices like MSCI World or S&P 500, but they exclude companies with low ESG scores. Instead, these funds buy more “best in class” companies. They also exclude companies connected to problematic sectors like tobacco and weapons. (Fossil fuels are generally not excluded, though total energy exposure is reduced vs. conventional funds).

ESG scoring methodology varies from one fund to another, but most big ETF managers rely on data from index providers MSCI and FTSE. So, when you buy most large ESG funds, you buy what MSCI or FTSE say is sustainable.

Passive ESG funds tend to be among the cheapest to own and trade. All U.S. funds listed below have over $2 billion in assets and expense ratios between 0.10% and 0.25%, similar to conventional ETFs.

Some of the most popular ESG exchange-traded funds are:

FundTickerExpense RatioAssets ($bn)Inception DateFossil Free Funds RatingMSCI RatingSustainalytics Rating
iShares ESG Aware MSCI USA ETFESGU0.15%22.32016CA4 / 5
Vanguard ESG U.S. Stock ETFESGV0.12%5.32018BA4 / 5
Xtrackers MSCI USA ESG Leaders Equity ETFUSSG0.10%3.92019BAA5 / 5
iShares ESG MSCI USA Leaders ETFSUSL0.10%3.92019BAA5 / 5
iShares MSCI USA ESG Select ETFSUSA0.25%3.82005CAA5 / 5
iShares MSCI KLD 400 Social ETFDSI0.25%3.52006CAA5 / 5
Xtrackers S&P 500 ESG ETFSNPE0.10%0.82019CA4 / 5

Data as of 8/31/2021

iShares ESG Aware MSCI USA ETF (ESGU)

  • Expense ratio: 0.15%

Launched in 2016, ESGU is one of the cheapest and most liquid ESG ETFs. The fund was designed to give you broad and diversified exposure to the U.S. stock market. As an ESG fund, it gives more weight to companies with high ESG scores, as defined by MSCI. Tobacco and weapons companies are excluded, though oil and gas companies are not. Like other ESG ETFs, the fund has a lot of exposure to tech companies. 

Vanguard ESG U.S. Stock ETF (ESGV)

  • Expense ratio: 0.12%

Launched in 2018, ESGV is more diversified than other ETFs on this list. It invests in nearly 1,500 small, mid and large-cap U.S. stocks. ESGV is the largest ESG ETF that excludes companies that own fossil fuel reserves. The stocks are screened based on the ESG criteria set by the index provider FTSE. Industries such as adult entertainment, alcohol, weapons, gambling, and nuclear power are also excluded. Key sectors are tech, financials, and healthcare.

🔔 Learn more about ESGV and other ESG funds from Vanguard.

iShares ESG MSCI USA Leaders ETF (SUSL) and Xtrackers MSCI USA ESG Leaders Equity ETF (USSG)

  • Expense ratio: 0.10% for both

SUSL and USSG track the same index and invest in large and mid-cap US companies with high ESG scores within their industries. The index excludes weapons, alcohol, gambling, tobacco, and nuclear power. Companies involved in ESG controversies are excluded, but fossil fuel companies are allowed. SUSL and USSG are the cheapest ESG ETFs we’ve seen. Both were launched in 2019.

iShares MSCI USA ESG Select ETF (SUSA)

  • Expense ratio: 0.25%

Launched in 2005, SUSA is the oldest ESG ETF. SUSA invests in mid and large-cap U.S. companies with best in class ESG scores as defined by MSCI. Tobacco and firearms are excluded. SUSA is more selective than other ESG funds, with around 200 holdings. Tech and healthcare are the top sectors, and SUSA still has exposure to fossil fuels. SUSA costs 0.25% annually.

iShares MSCI KLD 400 Social ETF (DSI)

  • Expense ratio: 0.25%

Launched in 2006, DSI tracks the MSCI KLD 400 Social Index, which is composed of 400 companies with the highest ESG scores in each sector. The index excludes alcohol, tobacco, gambling, weapons, nuclear power, adult entertainment, and GMOs. DSI still invests in fossil fuel companies. This ETF has a 0.25% expense ratio, which is not too bad, but higher than some of its peers.

Xtrackers S&P 500 ESG ETF (SNPE)

  • Expense ratio: 0.10%

SNPE invests in S&P 500 stocks, excluding tobacco, controversial weapons, and businesses with low ESG scores. Weights assigned to each industry mirror those of the S&P500. Fossil fuels are not excluded, but exposure to energy is lower than for S&P500. The fund was launched in 2019, and its 0.10% expense ratio makes it one of the cheapest funds in the ESG ETF universe.

💰 Our pick

Our top picks are USSG and SUSL, which track the same index (MSCI USA Extended USG Leaders). USSG and SUSL are the cheapest ETFs with only a 0.10% expense ratio. Though the ETFs don’t exclude fossil fuels, they have a B rating from Fossil Free Funds (better than most peers). The funds also have high ratings from MSCI and Morningstar.

Developed markets ETFs

Foreign stocks are less correlated with U.S. political events and the U.S. economy. Investing in international stocks can be a great way to diversify your equity holdings.

Although U.S. stocks have done better than foreign stocks over the past decade, valuations overseas are now cheaper. Foreign equities are also less exposed to large tech companies like Google and Facebook. Tech companies represent up to 30% of broad market U.S. ETFs, and your equity portfolio is at risk if they start to underperform.

Personal finance experts recommend investing 15% to 25% of your portfolio in overseas equities. You can allocate 10-20% to developed markets and 5% to 10% to emerging markets.

Here are some of the largest equity ESG ETFs that invest in developed market equities. They give you exposure to many different countries, particularly Japan and the U.K.

FundTickerExpense RatioAssets ($m)Inception DateFossil Free Funds RatingMSCI RatingSustainalytics Rating
iShares ESG Aware MSCI EAFE ETFESGD0.20%6,8002016DAAA3 / 5
Vanguard ESG International Stock ETFVSGX0.17%2,5902018BAA2 / 5
iShares ESG Advanced MSCI EAFE ETFDMXF0.12%2492020BAAA5 / 5
IQ Candriam ESG International Equity ETFIQSI0.15%2102019DAA3 / 5
Nuveen ESG Developed Markets Equity ETFNUDM0.40%1442017CAAA4 / 5

Data as of 8/31/2021

iShares ESG Aware MSCI EAFE ETF (ESGD)

  • Expense ratio: 0.20%

ESGD tracks an index of developed market stocks ex-U.S. and Canada with positive ESG characteristics, as defined by MSCI. Launched in 2016, it is the largest developed market ESG fund by assets under management. Its top three regions are Japan, the UK, and France. ESGD excludes tobacco stocks, certain weapons companies, and companies experiencing severe business controversies. However, the fund does invest in fossil fuels. Oil and gas holdings include BP at almost 1% of assets. As a result, ESGD has a very low rating from Fossil Free Funds despite a high ESG rating from MSCI (which prioritizes other factors).

Vanguard ESG International Stock ETF (VSGX)

  • Expense ratio: 0.17%

VSGX tracks a market-cap-weighted index of global ex-U.S. companies screened for ESG criteria. Unlike other ETFs, VSGX has some exposure to emerging markets like Hong Kong, though the bulk of its holdings are in developed markets. Japan, Hong Kong, and the UK are the top regions. Some of the top holdings are Asian tech companies like Alibaba and Tencent. Unlike other funds on the list that invest in a few hundred stocks, VSGX is very diversified, with over 5,000 holdings. It excludes companies in “vice” industries like gambling, weapons, and fossil fuels. Thanks to the exclusion of fossil fuels, VSGX has a B rating from Fossil Free Funds. (It didn’t receive an A rating because of small mineral resources holdings).

🔔 Learn more about VSGX and other ESG funds from Vanguard.

iShares ESG Advanced MSCI EAFE ETF (DMXF)

  • Expense ratio: 0.12%

Launched in mid-2020, DMXF has grown rapidly and currently has $250 million in assets under management. DMXF tracks a market-cap weighted, ESG-screened index of developed market stocks ex-U.S. and Canada. Japan, France, and the UK are the top regions. In addition to the usual ESG exclusions (gambling, tobacco, weapons), DMXF screens out fossil fuels. It has high rankings from Fossil Free Funds, MSCI, and Sustainalytics. DMXF is also the cheapest international ETF on our list, with a 0.12% expense ratio.

IQ Candriam ESG International Equity ETF (IQSI)

  • Expense ratio: 0.15%

Launched in 2019, IQSI tracks a proprietary index of developed-market stocks selected by ESG criteria. The criteria are developed by IndexIQ and Candriam, a European company that is part of New York Life Investments. Companies are ranked relative to their competitors in the same sector. The top countries are Japan, the UK, and France. IQSI does not exclude fossil fuels and, as a result, has a low D rating from Fossil Free Funds. IQSI is one of the cheapest ETFs on the list, with only a 0.15% expense ratio.

Nuveen ESG International Developed Markets Equity ETF (NUDM)

  • Expense ratio: 0.40%

NUDM screens for firms with positive ESG characteristics in the developed markets ex-US space. The screens also exclude alcohol, tobacco, gambling, and weapons (but not fossil fuels). The top three countries are Japan, the UK, and Switzerland. The fund was launched in 2017 and charges 0.40%, making it the most expensive fund on our list.

💰 Our pick

iShares ESG Advanced MSCI EAFE ETF (DMXF) is not only the cheapest fund on the list but also the highest-rated. It is one of the few international equity ETFs to exclude fossil fuels. While it was only launched in mid-2020, we are confident it will continue to grow.

Emerging markets ETFs

Emerging market funds invest in countries with developing economies, such as China, India, Russia, or Brazil. These economies are growing faster than developed markets, and you should consider adding that growth to your portfolio. However, emerging markets stocks are also more volatile. Personal finance experts recommend investing 5-10% of your portfolio in emerging markets.

ESG factors are even more relevant outside developed markets because governance – the G in ESG – is critical. A Cambridge Associates study found that MSCI’s Emerging Markets ESG Leaders Index has outperformed the conventional Emerging Markets Index every year, possibly because highly rated ESG companies are better run.

Here are the top emerging market ESG funds:

FundTickerExpense RatioAssets ($m)Inception DateFossil Free Funds RatingMSCI RatingSustainalytics Rating
iShares ESG Aware MSCI EM ETFESGE0.25%7,0802016DAA4 / 5
iShares ESG MSCI EM Leaders ETF LDEM0.16%8792020DA3 / 5
SPDR MSCI EM Fossil Fuel Reserves Free ETF EEMX0.30%1782016CBBB3 / 5
Nuveen ESG Emerging Markets Equity ETF NUEM0.45%1122017CAA4 / 5
iShares ESG Advanced MSCI EM ETFEMXF0.16%222020BAA4 / 5

Data as of 8/31/2021

iShares ESG Aware MSCI EM ETF (ESGE)

  • Expense ratio: 0.25%

With over $7bn in assets, ESGE is by far the largest international equity ESG ETF. Its assets have grown a lot during 2020. ESGE tracks an ESG-weighted index of stocks from emerging market economies while attempting to mimic the broad market. The top three regions are Hong Kong, Taiwan, and South Korea. ESGE completely excludes tobacco, certain weapons and firearms, thermal coal, and oil sands. It still invests in other fossil fuel companies and has a D rating from Fossil Free Funds.

iShares ESG MSCI EM Leaders ETF (LDEM)

  • Expense ratio: 0.16%

LDEM is a new fund launched by BlackRock in early 2020, but it has already attracted over $850 million in assets. LDEM tracks an MSCI index that invests in emerging market companies with high ESG scores relative to peers. The top countries are Hong Kong (China), Taiwan, and India. Tobacco, gambling, weapons, and firearms are excluded. Fossil fuels are not, leading to a D rating from Fossil Free Funds. The low rating is because of holdings like Russian natural gas producer Gazprom (1% of assets) and Russian oil company Lukoil (nearly 1% of assets). On the positive side, LDEM is one of the cheapest funds on the list costing only 0.16%.

SPDR MSCI Emerging Markets Fossil Fuel Reserves Free ETF (EEMX)

  • Expense ratio: 0.30%

EEMX tracks the MSCI Emerging Markets Index ex fossil fuel reserves. It’s not explicitly an ESG ETF because it doesn’t weigh stocks according to environmental, social, or governance metrics. EEMX doesn’t own companies with fossil fuel reserves, though it can own oil and gas companies like service providers that don’t own reserves. As such, it is rated C at Fossil Free Funds. EEMX charges 0.30% annually.

Nuveen ESG Emerging Markets Equity ETF (NUEM)

  • Expense ratio: 0.45%

NUEM is the sister ETF to Nuveen ESG International Developed Markets Equity ETF (NUDM). Launched in 2017, NUEM tracks an index of emerging market stocks that screen highly on ESG criteria. In addition to excluding weapons, nuclear power, and gambling, NUEM bans companies that go over certain carbon emissions thresholds. NUEM still owns fossil fuels and has a C rating from Fossil Free Funds. It has reasonably high ESG scores from MSCI and Sustainalytics, but it is also the most expensive fund on the list, with a 0.45% expense ratio.

iShares ESG Advanced MSCI EM ETF (EMXF)

  • Expense ratio: 0.16%

Launched in October 2020, EMXF is a new ETF with only $20 million in assets, but it is growing rapidly. EMXF tracks an index of emerging market equities screened for positive ESG ratings. Nuclear power, GMOs, private prisons, and palm oil are excluded. Fossil fuel-related companies are also excluded. With an expense ratio of only 0.16%, it is also one of the two cheapest ETFs on the list.

💰 Our pick

We like the newly launched iShares ESG Advanced MSCI EM ETF (EMXF). It charges only 0.16% and excludes fossil fuel reserve owners and a host of other controversial industries. The fund also has strong ESG scores from MSCI and Sustainalytics. While the ETF is currently small, we expect its assets will grow quickly.

Featured Investing Products

Build custom ESG portfolios for free

Fees

$0

$125 for M1 Plus

Minimum

$100

Open a green bank account

Fees

Pay what you want

Minimum

$0

Save your change and invest in ESG portfolios

Fees

$3-$5

/month

Minimum

$5

Fossil free ETFs

Why do so many ESG ETFs invest in oil and gas stocks?

There are two reasons for that.

First, the biggest ESG funds like ESGU or DSI track a broad market index while adding ESG criteria. The broad market includes fossil fuel-related stocks; they represent around 6-7% of the S&P500 index. As a result, market-tracking ESG funds have to buy fossil fuel stocks to reduce the tracking difference versus the index. For example, iShares ESG MSCI USA ETF (ESGU), the biggest ESG ETF, has holdings in oil companies Exxon Mobil (0.5% of assets) and Chevron (0.4% of assets).

The goal of these ETFs – since they have to include some energy stocks anyway – is to find the least bad ones. The choices can be controversial – is Exxon really the best oil company you should own? But the motivation is to “pick the best house in the worst neighborhood.”

Second, ESG ETFs rely on ratings that include social and governance factors. Some polluting oil and gas companies score highly on governance and worker treatment and get decent ESG scores overall (despite poor environmental scores). As a result, they are included in ESG ETFs.

Should you only buy ETFs that don’t own oil and gas stocks?

Maybe.

First, divestment (or selling fossil fuel stocks) has gained support among many pension funds, university endowments, and even the Church of England. If pension funds and universities continue to sell oil, gas, and coal company stocks, their share prices will go down. These companies may find it more expensive to raise money in the stock market and their funding costs will go up, making new exploration projects more costly.

Second, companies like Exxon, Shell, and BP sit on huge oil and gas reserves, but they may never develop these “stranded assets” as we transition to clean energy. According to Carbon Tracker, 60-80% of the known oil, gas, and coal reserves of publicly listed companies will never be extracted. Energy companies such as Royal Dutch Shell and BP are popular dividend stocks, yet both had to cut their dividends. Divestment is then a prudent financial move.

And, of course, many investors don’t want to profit from oil and gas stocks even if they go up in price.

How do you choose fossil free ETFs?

Several ESG funds are marketed as “fossil free,” but the definition of “fossil free” varies. For example, SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX) excludes companies that sit on oil and gas reserves but not related businesses like oilfield services. You can look up any fund’s fossil fuel holdings in the Fossil Free Funds database.

You should also be aware that some fossil free ETFs do not incorporate social or governance factors. They simply mirror traditional indices ex fossil fuels.

Here are the largest funds marketed as fossil free:

FundTickerTypeSustainFi RatingExpense RatioAssets ($m)Fossil Fuels (% of Assets)Fossil Free Funds RatingMSCI RatingSustainalytics Rating
Vanguard ESG U.S. Stock ETF
ESGVU.S. Equities
4.60.12%5,3000.7%BA4 / 5
SPDR S&P 500 Fossil Fuel Reserves Free ETFSPYXU.S. Equities
3.90.20%1,2104.6%CA3 / 5
iShares ESG Advanced MSCI USA ETF
USXF
U.S. Equities
4.90.10%
4290%
AAA
5 / 5
Etho Climate Leadership US ETFETHOU.S. Equities
3.80.48%1780%AA4 / 5
The Change Finance U.S. Large Cap Fossil Fuel Free ETF CHGXU.S. Equities
4.10.49%940%AA5 / 5
SPDR MSCI EAFE Fossil Fuel Reserves Free ETFEFAXDeveloped Markets4.10.20%2501.5%BAA3 / 5
SPDR MSCI EAFE Fossil Fuel Reserves Free ETFDMXFDeveloped Markets4.90.12%2490.3%BAAA5 / 5
SPDR MSCI Emerging Markets Fossil Fuel Reserves Free ETFEEMXEmerging Markets3.40.30%1783.2%CBBB3 / 5
iShares ESG Advanced MSCI EM ETF
EMXF
Emerging Markets3.90.16%220.15%BAA4 / 5
iShares iBoxx USD High Yield ex Oil & Gas Corporate Bond ETFHYXF
USD Bonds
3.30.35%1180%NRANR

Data as of 8/31/2021

🔔 You can read our guide to fossil free ETFs here.

iShares ESG Advanced MSCI USA ETF (USXF)

  • Type: U.S. Equities
  • Expense ratio: 0.10%
  • Fossil fuel stocks (% of assets): 0%

Launched in mid-2020, USXF is a relatively new fund, but it has already attracted over $400 million in assets. USXF tracks the MSCI USA Choice ESG Screened Index, which includes large and mid-cap U.S. equities with positive ESG ratings. The index excludes companies involved in fossil fuels (both reserve owners and related businesses.) Firms involved in nuclear weapons, genetic engineering, palm oil, private prisons, and predatory lending are also excluded.

The fund owns over 300 stocks, notably in tech (one-third of assets) and financials. Top holdings are NVIDIA, Visa, and Home Depot. The fund owns no energy at all and has stellar ESG ratings from MSCI and Sustainalytics to boot.

iShares ESG Advanced MSCI EAFE ETF (DMXF)

  • Type: Developed Markets Equities
  • Expense ratio: 0.12%
  • Energy as % of assets: 0.3%

Launched in mid-2020, DMXF has grown rapidly and currently has nearly $250 million in assets under management. DMXF tracks MSCI EAFE Choice ESG Screened Index – a market-cap weighted, ESG-screened index of developed market stocks ex-U.S. and Canada.

The ETF screens out fossil fuels, excluding companies that own reserves and related businesses. In addition to fossil fuels, DMXF excludes adult entertainment, alcohol, gambling, tobacco, GMO, weapons, nuclear power, firearms, for-profit prisons, and predatory lenders. DMXF has high rankings from Fossil Free Funds, MSCI, and Sustainalytics. DMXF is also the cheapest international ETF on our list, with a 0.12% expense ratio.

iShares ESG Advanced MSCI EM ETF (EMXF)

  • Type: Emerging Markets Equities
  • Expense ratio: 0.16%
  • Energy as % of assets: 0.15%

Launched in October 2020, EMXF is a new ETF with around $20 million in assets. Given sponsorship from BlackRock, the world’s leading asset manager, the ETF should grow.

EMXF tracks the MSCI Emerging Markets Choice ESG Screened 5% Issuer Capped Index, an index of emerging market equities screened for positive ESG ratings. EMXF excludes companies tied to fossil fuels (beyond reserve owners) and has almost zero energy exposure. EMXF also excludes multiple controversial activities like nuclear power, GMOs, palm oil, private prisons, and predatory lending.

The fund has around 350 holdings, mostly stocks in Hong Kong, Taiwan, and India. With an expense ratio of only 0.16%, it is the cheapest emerging markets ETF on the list.

💰 Our pick

We like USXF for U.S. equities, DMXF for developed markets equities, and EMXF for emerging markets equities. These funds exclude fossil fuels and take social and governance factors into account. They also have the lowest fees. Learn more about fossil free funds.

Bond ETFs

Equities have historically returned more than bonds, but bonds are less volatile and can protect your portfolio if the equity markets drop. This is particularly important if you are close to retirement and may need the money soon. Think of bonds as insurance for your portfolio. Thanks to a stream of interest payments, bond prices are less volatile. Over the past two decades, bonds have generally risen when stocks have fallen.

The classic “60/40” portfolio recommends putting 60% of your money in stocks and 40% in bonds, though the bond allocation could be higher as you approach retirement age.

Unless you are an accredited investor, you can’t buy bonds directly. But you can look at ESG bond funds. Bond investors are risk-averse, and ESG helps minimize social, governance, and environmental risks.

Here are some of the top ESG bond funds:

FundTickerExpense RatioAssets ($m)Inception DateMSCI RatingYield
iShares ESG Aware U.S. Aggregate Bond ETFEAGG0.10%1,5202018A1.5%
iShares ESG Aware 1-5 Year USD Corporate Bond ETFSUSB0.12%1,0102017AAA0.9%
iShares ESG Aware USD Corporate Bond ETFSUSC0.18%8222017AA2.2%
iShares ESG Advanced Total USD Bond Market ETFEUSB0.12%4502020A1.4%
Nuveen ESG US Aggregate Bond ETFNUBD0.20%2642017A1.5%

Data as of 8/31/2021

iShares ESG Aware U.S. Aggregate Bond ETF (EAGG)

  • Expense ratio: 0.10%

Established in 2018, EAGG is the largest and cheapest ESG bond fund. EAGG tries to mirror the risk-return of the Bloomberg Barclays US Aggregate Bond Index. It buys a broad index of high-quality, medium-term USD bonds screened for favorable ESG characteristics. In addition to government bonds, EAGG invests in mortgage-backed securities and corporate debt. Civilian firearms, controversial weapons, tobacco, thermal coal, and oil sands are excluded. The fund is not fossil fuel free – it counts Exxon bonds among its investments.

iShares ESG Aware 1-5 Year USD Corporate Bond ETF (SUSB)

  • Expense ratio: 0.12%

SUSB is a short-term version of SUSC. It buys corporate debt screened for ESG characteristics, but the debt matures within a shorter timeframe, one to five years. Civilian firearms, controversial weapons, tobacco, thermal coal, and oil sands are again excluded, but fossil fuels are not. Energy is about 6% of the fund. The fund has a high rating from MSCI (AAA). Because the fund invests in shorter-term bonds, the return is also lower, currently less than 1%.

iShares ESG Aware USD Corporate Bond ETF (SUSC)

  • Expense ratio: 0.18%

Unlike EAGG, which buys government and corporate bonds, SUSC invests in corporate bonds. As a result, it generates a higher return, yet the quality of the portfolio is still very high. SUSC tracks a broad index of medium-term USD-denominated corporate bonds screened for positive ESG characteristics. Civilian firearms, controversial weapons, tobacco, thermal coal, and oil sands are excluded. Fossil fuels are not. In fact, energy represents 6.6% of the fund’s investments. The fund still gets a high AA rating from MSCI.

iShares ESG Advanced Total USD Bond Market ETF (EUSB)

  • Expense ratio: 0.12%

Launched in June 2020, EUSB has a similar risk and return profile to EAGG despite stricter exclusionary criteria. Both EAGG and EUSB invest in USD-denominated government and corporate bonds with high credit quality. Holdings are screened for ESG characteristics.

EUSB has more exclusionary screens. EAGG excludes civilian firearms, controversial weapons, tobacco, thermal coal, and oil sands. EUSB adds exclusions of adult entertainment, alcohol, guns, for-profit prisons, fossil fuels, gambling, GMOs, nuclear power, nuclear weapons, palm oil, and predatory lending. This is the only sizeable ESG bond ETF that excludes fossil fuels (though it still owns oil and gas-powered utilities). As a result of its tougher investment criteria, EUSB only has around 2,400 holdings versus nearly 3,500 for EAGG.

Nuveen ESG US Aggregate Bond ETF (NUBD)

  • Expense ratio: 0.20%

Nuveen’s ESG bond ETF invests in government, mortgage-backed and corporate debt in the Bloomberg Barclays U.S. Aggregate Bond Index. Holdings are screened for ESG criteria. The fund’s credit quality, return profile, and MSCI ratings are similar to EAGG, but NUBD has fewer investments, and the expense ratio is twice as high.

Our Pick:

💰 Our pick

We prefer EUSB due to its high credit quality, exclusion of fossil fuel companies, and low cost (0.12%).

Clean energy ETFs

The best-known ESG funds usually track a market index screened for ESG criteria, in some cases excluding fossil fuels. But most of the companies in the index aren’t doing much to fight climate change. If you own a large ESG ETF, your top investments are probably Apple, Microsoft, Amazon, Facebook, and Google.

What if you want to invest in companies that make a difference to climate change? Look at clean energy funds. These funds invest in wind and solar energy, hydrogen fuel cells, and electric cars.

The energy sector is the primary driver of climate change. With the Biden presidential win, political support for clean energy has increased. The cost of renewables is now comparable to fossil fuels.

Wind and solar projects are seeing a flow of investment dollars and gaining consumer acceptance. The cost of renewables is dropping rapidly; for instance, wind was two-thirds cheaper in 2016 than in 2009, and solar was a whopping 85% cheaper. Renewable energy provides around 13% of global energy needs, and wind is now producing close to 5.5% of US electricity. 

A word of caution: green funds outperformed in 2020 and – despite losses in 2021 – are still trading at very high valuations. Unlike a broad market index fund, clean energy funds own few stocks, which is risky. Some sectors these funds invest in – like solar energy – are exposed to a lot of competition and regulation. We do not recommend putting more than 3-5% of your assets in clean energy funds. 

FundTickerCategoryExpense ratioAssets ($bn)Number of HoldingsFossil Free Funds RatingMSCI RatingSustainalytics Rating
iShares Global Clean Energy ETFICLNClean energy (global)0.42%6.181FAAA4 / 5
Global X Lithium & Battery Tech ETFLITLithium0.75%4.838-BBB3 / 5
Invesco Solar ETFTANSolar energy0.69%3.246AAA1 / 5
First Trust NASDAQ Clean Edge Green Energy Index FundQCLNClean energy (U.S.)0.60%2.653AA1 / 5
Invesco WilderHill Clean Energy ETFPBWClean energy (U.S.)0.61%1.867AA-
ALPS Clean Energy ETFACESClean energy (U.S.)0.55%0.946CAA3 / 5
First Trust Global Wind Energy ETFFANWind energy0.62%0.450FAA4 / 5

Data as of 8/31/2021

iShares Global Clean Energy ETF (ICLN)  

  • Expense ratio: 0.42%

Established in 2008, ICLN tracks an index of roughly 80 clean energy companies. These companies are in the biofuels, ethanol, geothermal, hydroelectric, solar, and wind industries.

ICLN is a global fund; its top three regions are the U.S. (39% of assets), Denmark (around 15%), and Spain (6%). ICLN’s top investments are wind power stocks Vestas and Orsted and the home solar company Enphase Energy. ICLN has one of the lowest expense ratios among clean energy ETFs (0.42%).

Although the fund has good ESG ratings from MSCI and Sustainalytics, it got an F from Fossil Free Funds because it owns multiple utility companies. Utilities are among the largest developers of wind and solar energy worldwide.  Even utilities that are investing in renewables continue to burn fossil fuels. This is unavoidable during the transition phase, and we do not recommend dismissing ICLN on that basis.

Global X Lithium & Battery Tech ETF (LIT)

  • Expense ratio: 0.75%

Lithium is a mineral used to make lithium-ion batteries, which go into most electric cars manufactured today. Investing in a lithium ETF is an indirect way to profit from the growth in electric cars.

Decade-old LIT is the largest lithium ETF in the market. It invests in lithium mining, refining, and battery production stocks. The fund is very concentrated – it has fewer than 40 holdings, and the top ten are 60% of the assets. The largest holding, lithium miner Albemarle, is over 14% of the fund. LIT is a global ETF, investing in mainland China (~40%), the U.S. (20%), and Hong Kong (13%).

LIT is a natural resources ETF; it is driven by commodities supply and demand and has been highly volatile. The ETF returned 127% in 2020 and 30% in 2021 through September, but the fund had had some bad years. It was down almost 37% in 2011 and 28% in 2018 when lithium prices declined.

🔔 Learn how to invest in lithium.

Invesco Solar ETF (TAN)

  • Expense ratio: 0.69%

Since 2016, solar has overtaken wind as the fastest-growing renewable technology. TAN is the ETF for investment in solar energy. Launched in 2008, it tracks an index of global solar energy companies, overweighing “pure-play” companies. There aren’t many publicly traded solar businesses, so this ETF owns only about 45 companies, mainly in the US, Hong Kong, and mainland China.  The top ten stocks are over 50% of the fund’s assets.

As expected, TAN has been very volatile. The fund was up 234% in 2020 but declined 20% in 2021 through September. Solar power has relied on government subsidies and tax credits in its largest markets, the U.S. and China. Changes to subsidies have created volatility. The sector is also sensitive to changes in oil and natural gas prices.

🔔 Learn how to invest in solar energy.

First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN)

  • Expense ratio: 0.60%

Launched in 2007, QCLN tracks around 50 mostly American clean energy firms. The ETF includes suppliers of smart grid technologies, hybrid batteries, and renewable energy. Tesla is the number one holding, followed by lithium miner Albemarle. Over 50% of the fund’s assets are in just ten stocks. Most holdings are in the U.S. (80% of assets), followed by China (11%). QCLN costs 0.60% annually, somewhere in the middle of the range among its clean energy peers.

Invesco WilderHill Clean Energy ETF (PBW)

  • Expense ratio: 0.61%

The oldest clean energy ETF, PBW selects U.S.-listed companies in renewable energy and clean tech. Thanks to its proprietary selection process, PBW’s holdings go beyond the obvious pure-play wind and solar stocks. The top three holdings are lithium miners Albemarle and Lithium Americas and Chinese solar panel maker JinkoSolar. PBW has around 70 holdings, and the top ten are only a fifth of its assets, reducing concentration risk.

ALPS Clean Energy ETF (ACES)

  • Expense ratio: 0.55%

ACES tracks an index of U.S. and Canada-listed companies in renewable energy (solar, wind, hydropower, and biofuels) and clean tech (electric vehicles, battery technology, fuel cells, smart grids). The fund has around 40 holdings, and the top 10 are over 50% of its assets. The top three are solar panel manufacturer First Solar, Tesla, and residential solar provider Enphase Energy. ACES is like a North American version of iShares Global Clean Energy ETF (ICLN). Its expense ratio is also among the lowest in the space.

First Trust Global Wind Energy ETF (FAN)

  • Expense ratio: 0.62%

Wind is the second biggest source of renewable energy after solar; FAN is the only global ETF that specifically invests in the wind industry. Around 60% of the fund is invested in “pure-play” wind companies. FAN has 50 holdings, of which the top ten make up over 50% of the fund’s assets. This ETF invests globally: Canada, Denmark, and Hong Kong are the top three regions. Like other clean energy ETFs, FAN has been very volatile. It returned over 60% in 2020, but dropped 9% in 2021 (through September). It was also down 22% in 2011 and 11% in 2018.

Despite high ESG scores from MSCI and Sustainalytics, FAN got an F from Fossil Free Funds. Many holdings are utilities that are developing wind power yet still rely on fossil fuels. Clean energy fund darling NextEra is a prime example of that. We don’t see this as a reason not to invest because the transition to renewables will not be instantaneous.

🔔 Learn how to invest in wind energy.

💰 Our pick

Our picks are ICLN for clean energy overall, TAN for solar, FAN for wind, and LIT for lithium. TAN, FAN, and LIT are the leading ETFs in their niches. We like ICLN for its low expense ratio and trading cost, as well as global reach.

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Socially conscious and impact ETFs

If you mostly care about the “S” in ESG, take a look at funds that target corporate social responsibility and gender and ethnic diversity. Some of these funds could be a great way to align your portfolio with the issues you care about.

Having said that, socially conscious ETFs have relatively few holdings compared to broad market ETFs. We don’t recommend allocating more than 5% of your portfolio to them.

There are several different flavors of socially conscious funds:

FundTickerExpense RatioAssets ($m)Inception DateFossil Free Funds RatingMSCI RatingSustainalytics Rating
iShares MSCI Global Impact ETFSDG0.49%5662016BAA2 / 5
Global X Conscious Companies ETFKRMA0.43%4972016CA4 / 5
SPDR SSGA Gender Diversity Index ETFSHE0.20%2832016CAA4 / 5
Goldman Sachs JUST U.S. Large Cap Equity ETFJUST0.20%2602018CA3 / 5
Impact Shares NAACP Minority Empowerment ETFNACP0.49%352018CA4 / 5

As of 8/31/2021

iShares MSCI Global Impact ETF (SDG)

  • Expense ratio: 0.49%

SDG invests in companies that derive over 50% of revenues from services or products that address at least one of the United Nations Sustainable Development Goals (SDG). The UN General Assembly adopted the list of 17 goals in 2015. In addition to climate change and biodiversity, UN SDGs include no poverty, zero hunger, good health and well-being, quality education, gender equality, clean water, and many others.

SDG has around 140 holdings with a tilt towards healthcare (17% of assets) and consumer stocks. It is refreshing to see a sustainable fund that doesn’t own a lot of tech – in fact, SDG’s exposure to tech is minimal (1.3% of assets). SDG invests in multiple geographies, notably the U.S. (28%), Hong Kong (16%), and Japan (13%). Top holdings are a forestry company West Fraser, East Japan Railway, and wind turbine maker Vestas.

SDG is an interesting concept, though it is quite expensive (0.49% expense ratio).

Global X Conscious Companies ETF (KRMA)

  • Expense ratio: 0.43%

Launched in 2016, KRMA invests in U.S. companies that achieve positive outcomes for customers, suppliers, shareholders, local communities, and employees. The ETF tracks an index that scores companies on employee productivity, customer loyalty, corporate governance, and other ESG characteristics. Companies below $2 billion in market cap are excluded. There are no sector exclusions, and the fund has some energy holdings, earning it a C rating from Fossil Free Funds. KRMA has 165 holdings, skewed towards tech (~30% of assets). Its top three stocks are Apple, Microsoft, and Google, which is typical for most broad market ETFs. KRMA has a 0.43% expense ratio.   

SPDR SSGA Gender Diversity Index ETF (SHE)

  • Expense ratio: 0.20%

Launched in 2016, SHE invests in U.S. companies with a high percentage of women who are executives or directors. The fund picks stocks from the top 1,000 US companies and weighs them based on market cap. Companies in the top 10% in each sector are included in the portfolio, with the caveat that each firm must have at least one woman on its board or as the CEO. SHE has roughly 190 holdings with a lot of tech exposure (34% of assets). Energy is not excluded, but it is a moderate 2% of assets. The top three holdings are Walt Disney, PayPal, and salesforce.com. SHE is inexpensive, with a 0.20% expense ratio. We think it’s a good choice overall.

🔔 Learn more about investing in gender equality.

Goldman Sachs JUST U.S. Large Cap Equity ETF (JUST)

  • Expense ratio: 0.20%

JUST tracks an index of large-cap U.S. stocks based on a survey assessing business behavior. The index was developed by Just Capital, a nonprofit. They run surveys of how companies treat their workers, customers, products, the environment, communities, job creation, and shareholders.

JUST has 440 holdings with a lot of tech exposure (36% of assets). The top holdings are – unsurprisingly – big tech companies such as Apple, Microsoft, and Amazon, which are presumably well-liked by survey respondents. While JUST is an interesting concept, top holdings resemble the S&P500 and the larger ESG ETFs. The fund is cheap (0.20% expense ratio) compared to other socially conscious ETFs, but it is twice as expensive as large ESG ETFs like SUSL (0.10% expense ratio). On top of that, JUST has worse ESG scores than SUSL from several rating providers (MSCI, Sustainalytics, and Fossil Free Funds).

Impact Shares NAACP Minority Empowerment ETF (NACP)

  • Expense ratio: 0.49%

NACP is the first ETF to support the promotion of racial equality. It’s a small fund that invests in large and mid-cap U.S. companies that align with the NAACP’s vision of good corporate citizens. Fund manager Impact Shares created the fund using NAACP’s criteria. They score companies based on factors like board diversity and community involvement. The result has 190 holdings, including a lot of tech (44% of assets). The top investments are Apple, Nvidia, Microsoft, Facebook, and Google, similar to large ESG ETFs. The fund company cites its diversity initiatives, but returns don’t look different from much cheaper broad market ESG ETFs. (The fund returned 30% over the past year compared to 32% for ESGU.)

💰 Our pick

We like the SPDR SSGA Gender Diversity Index ETF (SHE) ETF. The fund’s concept is well executed, its expense ratio is low, and its top holdings differ from what we typically see in a broad market ESG ETF.

Download a full list of ESG ETFs.

🔔 Looking to broaden your sustainable investing journey beyond ETFs? Learn about ESG mutual funds.