The Top Ten Fossil Free Funds Reviewed

You may be surprised to find out that many environmental, social, and governance (ESG) exchange-traded funds (ETFs) and even so-called fossil free funds invest in oil and gas. If you are looking to make a greener choice with your money, read more to find out which ETFs are actually fossil free.

SustainFi Updated September 20, 2021

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Why do many “green” funds invest in fossil fuel stocks?

It is not a secret that many environmental, social, and governance (ESG) funds invest in oil and gas drillers. 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 (0.5% of assets). The recently launched $1.4 billion BlackRock U.S. Carbon Transition Readiness ETF (LCTU) also owns Chevron and Exxon.

Although the biggest ESG funds position themselves as environmentally friendly, they generally try to mimic the broader market while adding ESG criteria. Since the broad market includes fossil fuel stocks, many ESG funds include them too (though they pick fossil fuel companies with better than average ESG scores.)

Understandably, some green-minded investors find this deceptive and confusing. You may think that investing in an ESG fund should automatically mean you don’t own oil and gas stocks, but that is not the case.

Should you divest from oil, gas, and coal stocks?

Divestment from oil, gas, or coal is controversial. Divestment opponents argue that, given that we can’t end dependence on oil right away, climate goals are better achieved by engaging with oil and gas companies and urging them to transition to renewables. Divesting doesn’t reward polluters for decarbonizing, and many of the biggest investors in renewables and clean technologies are polluting companies. There is an argument that impact investing should be about staying invested and encouraging better behavior as a shareholder.

However, you may not want to profit from polluting stocks, or you may think that oil and gas companies will underperform as the world transitions to clean energy. In this case, you should consider fossil free funds.

What are fossil free ETFs and are they actually fossil free?

Fossil free fund managers pledge not to invest in fossil fuels. But the definition of “fossil free” varies: some funds only exclude companies that own fossil fuel reserves such as oil wells but not related businesses (like companies that service the oil wells). So they exclude oil majors like Exxon and Chevron, but not oilfield services stocks like Schlumberger or Baker Hughes.

You can look up any fund’s fossil fuel holdings in the Fossil Free Funds database. One caveat is that Fossil Free Funds penalize funds that own utility companies. In fact, utilities are some of the top investors in renewables like wind and solar. But while the climate transition is ongoing, utilities have to rely on fossil fuels in addition to clean energy to generate power. We are comfortable with including utilities in portfolios and investing in funds that don’t have A ratings from Fossil Free Funds.

You should also be aware that many fossil free ETFs do not incorporate social or governance factors, so fossil free is not always the same as ESG.

Top Ten Fossil Free ETFs

We’ve looked at the largest fossil free ESG ETFs that are marketed to investors today.

Our top picks are three iShares funds that invest in U.S. equities, developed markets equities, and emerging markets equities:

  • U.S. Equities: iShares ESG Advanced MSCI USA ETF (USXF)
  • Developed Markets Equities: iShares ESG Advanced MSCI EAFE ETF (DMXF)
  • Emerging Markets Equities: iShares ESG Advanced MSCI EM ETF (EMXF)
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 8/30/2021

Read more about each fossil free fund available today.

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Vanguard ESG U.S. Stock ETF (ESGV)

  • Type: U.S. Equities
  • Expense ratio: 0.12%
  • Fossil fuels as % of assets: 0.7%

Launched in 2018, ESGV tracks the FTSE US All Cap Choice Index. With over $5.3 billion in assets under management, ESGV is the largest ESG ETF that excludes fossil fuel companies.

The fund invests in around 1,500 small, mid and large-cap U.S. stocks. This is the most diversified fund on the list; it also lets you invest in small-cap stocks. The stocks are screened based on the ESG criteria from the index provider FTSE. The index excludes adult entertainment, alcohol, tobacco, weapons, gambling, and nuclear power in addition to fossil fuels.

ESGV goes beyond excluding companies that own reserves of coal, oil, or gas. It also excludes oilfield services, pipeline operators, refiners, and marketers. To compensate for the exclusion of energy, ESGV owns more tech than the broader market.

ESGV has one of the lowest expense ratios on the list at just 0.12%.

🔔 Learn more about Vanguard’s ESG funds.

💰 Takeaway

ESGV owns almost no energy stocks, so it’s a good pick for the fossil free investor. We also like ESGV’s diversification, exclusionary criteria, and low cost. (However, though ESGV is a good option, its manager Vanguard mostly runs non-ESG funds and has been criticized for voting against environmental resolutions at shareholder meetings. Voting decisions are made at the fund manager level and are not tied to a specific ESG fund.)

SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX)

  • Type: U.S. Equities
  • Expense ratio: 0.20%
  • Fossil fuels as % of assets: 4.6%

A large ETF with over $1 billion in assets under management, SPYX was launched in 2015 and tracks the S&P 500 Fossil Fuel Free Index. The index includes the S&P500 stocks minus companies that own oil, gas, and coal reserves. The fund was created when the National Resources Defense Council asked asset manager State Street to create a fund mirroring the S&P 500 minus Big Oil.

The definition of “fossil free” SPYX uses is different from what Vanguard ESG U.S. Stock ETF (ESGV) uses. SPYX only excludes companies that own reserves (but not related businesses); ESGV excludes nearly all oil and gas-related businesses.

As a result, around 5% of SPYX is still invested in fossil fuel companies like Schlumberger, Valero Energy, and Marathon Petroleum. Unexpectedly for a fossil free fund, the fund has a C rating from Fossil Free Funds.

SPYX is an OK choice if you are trying to track the S&P 500 and avoid Big Oil. But most fossil free investors want to go further and exclude oilfield services and other related businesses.

Further, SPYX doesn’t take any social or governance criteria into account. Its MSCI ESG rating (A) is the same as that of the (non-ESG) S&P500 index.

On top of that, the fees SPYX charges (0.20%) are excessive given that it just takes the S&P500 index and subtracts Big Oil stocks. The iShares Core S&P500 ETF (IVV) costs only 0.03% and has 13 additional holdings vs. SPYX.

💰 Takeaway

SPYX is not the best choice if you are looking to avoid fossil fuels. Not only are many fossil fuel companies still included, the fund is also quite expensive for what it is and does not take social and governance factors into account. (Like Vanguard, State Street has been criticized for voting against environmental shareholder resolutions. Most of the assets they run are non-ESG.)

iShares ESG Advanced MSCI USA ETF (USXF)

  • Type: U.S. Equities
  • Expense ratio: 0.10%
  • Fossil fuels as % 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 317 stocks, notably in tech (one-third of assets), financials, and consumer sectors. Top holdings are Nvidia, Visa, and Home Depot. The fund owns no energy and has stellar ESG ratings from MSCI and Sustainalytics to boot.

💰 Takeaway

USXF is both cheap (0.10%) and has very stringent exclusionary criteria and high ESG scores in addition to divesting from nearly all oil and gas stocks. This is the best choice if you want to divest from fossil fuels. (The fund’s manager, BlackRock, has been very vocal about the importance of ESG investing, creating a big ESG fund lineup. In the past, BlackRock has been criticized for not voting in favor of environmental shareholder resolutions, but it appears that their track record is improving during the 2021 proxy season.)

Etho Climate Leadership US ETF (ETHO)

  • Type: U.S. Equities
  • Expense ratio: 0.48%
  • Fossil fuels as % of assets: 0%

Launched in 2015, ETHO has over $170 million in assets under management. It tracks the Etho Climate Leadership Index, which selects the most carbon-efficient companies within their sector based on total greenhouse gas emissions per dollar invested.

ETHO excludes all fossil fuel stocks (as well as tobacco, defense, gambling, gold, and silver mining businesses). ETHO is the only ETF from Etho Capital, a certified B Corp which pledges to balance profit and purpose.

ETHO owns 264 stocks, mostly tech, industrials, and consumer companies. It has zero fossil fuel exposure, an A rating from MSCI, and four (out of five) globes from Sustainalytics.

Given the 0.48% expense ratio, ETHO is not the cheapest ETF, though it’s a very solid ESG and fossil fuel free option for U.S. equities.

💰 Takeaway

ETHO is not a bad option, and we like the index provider, Etho Capital, but the fund is expensive, costing 4.5 times as much as iShares ESG Advanced MSCI USA ETF (USXF). USXF has similar energy exposure and Fossil Free Funds rating. On top of that, USXF, which costs only 0.10%, has better ESG scores from MSCI and Sustainalytics.

The Change Finance U.S. Large Cap Fossil Fuel Free ETF (CHGX)

  • Type: U.S. Equities
  • Expense ratio: 0.49%
  • Fossil fuels as % of assets: 0%

Launched in 2017, CHGX is a small fund with roughly $90 million in assets under management. The fund employs some of the strictest ESG screens and criteria. It tracks the Change Finance Diversified Impact U.S. Large Cap Fossil Fuel Free Index, which excludes all fossil fuel-related businesses, including utilities and refiners. It also excludes companies that produce nuclear power, GMOs, military weapons, pesticides, companies with a history of controversial business practices (such as discrimination or corruption), and companies that don’t meet social or environmental standards (such as pollution or biodiversity).

CHGX has around 100 large-cap holdings, mostly tech, financials, and healthcare companies. No single holding exceeds 2% of the fund.

The fund has an A rating from Fossil Free Funds and strong ESG ratings from MSCI and Sustainalytics.

💰 Takeaway

CHGX has the strongest ESG criteria and zero exposure to fossil fuels. It is the only fossil free fund with an A rating from Fossil Free Funds. However, it’s the most expensive fund on our list, and cost can be prohibitive.

SPDR MSCI EAFE Fossil Fuel Reserves Free ETF (EFAX)

  • Type: Developed Markets Equities
  • Expense ratio: 0.20%
  • Fossil fuels as % of assets: 1.5%

EFAX was launched in 2016 and currently has over $250 million in assets under management. It tracks the MSCI EAFE ex Fossil Fuels Index, investing in large and mid-cap companies in developed markets ex-U.S. while excluding companies that own fossil fuel reserves. Fossil fuel reserves are defined as coal, oil, or natural gas reserves.

The portfolio includes nearly 800 holdings, mostly in Japan, the UK, and France. Exposure to fossil fuels is moderate at around 1.5% (mainly through utilities). The fund has a B rating from Fossil Free Funds.

However, EFAX doesn’t rank companies based on any social or governance factors. ESG ratings are mixed, highlighting different methodologies among rating agencies.

The fund costs 0.20%, which is not too bad.

💰 Takeaway

EFAX is not a bad option, but it’s hard to compete with iShares ESG Advanced MSCI EAFE ETF (DMXF), which is cheaper, higher rated, and has less energy exposure.

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iShares ESG Advanced MSCI EAFE ETF (DMXF)

  • Type: Developed Markets Equities
  • Expense ratio: 0.12%
  • Fossil fuels 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.

DMXF 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.

The fund has around 500 holdings; Japan, France, and the UK are the top regions. 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.

💰 Takeaway

DMXF is by far the best fossil free fund if you are looking for a developed markets equities fund.

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

  • Type: Emerging Markets Equities
  • Expense ratio: 0.30%
  • Fossil fuels as % of assets: 3.2%

Launched in 2016, EEMX is the emerging markets equivalent of EFAX. It manages over $170 million in assets and tracks the MSCI Emerging Markets Index ex fossil fuel reserve owners.

Because only companies that own oil, gas, natural gas, or coal reserves are excluded, EEMX still owns several energy companies and utilities that don’t directly own reserves. (3% of its assets are invested in fossil fuels.) The fund has a C rating from Fossil Free Funds.

EEMX has around 6000 holdings, driven by stocks in Hong Kong, Taiwan, and South Korea.

Because the fund doesn’t incorporate any ESG factors, it has mediocre ESG ratings from MSCI and Sustainalytics. The fund actually invests in Saudi Arabia (nearly 3% of assets) despite its controversial human rights record and reliance on oil.

Further, the fund’s expense ratio is relatively high (0.30%).

💰 Takeaway

EEMX is not the best choice for the green investor, both due to its investment selection and its high cost. Check out EMXF instead.

iShares ESG Advanced MSCI EM ETF (EMXF)

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

Launched in October 2020, EMXF is a new ETF with only $22 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 companies in Hong Kong, Taiwan, and India.

With an expense ratio of only 0.16%, it is the cheapest emerging markets ETF on the list.

💰 Takeaway

Despite its small size, EMXF is the best emerging markets ETF available, both for the fossil free investor and for the broader ESG investor.

iShares iBoxx USD High Yield ex Oil & Gas Corporate Bond ETF (HYXF)

  • Type: Corporate bonds
  • Expense ratio: 0.35%
  • Fossil fuels as % of assets: 0%

Launched in 2016, HYXF is the main fossil free corporate bond ETF. Today, the fund has over $100 million in assets.

HYXF tracks the Bloomberg Barclays MSCI US High Yield Choice ESG Screened Index, which screens issuers for ESG ratings. It also excludes any businesses related to fossil fuels, adult entertainment, alcohol, weapons, for-profit prisons, gambling, GMOs, nuclear power, nuclear weapons, palm oil, predatory lending, and tobacco businesses.

HYXF invests in high yield, USD-denominated corporate bonds. The fund’s 30-day yield (interest earned by the average investor in the fund over 30 days) was 3% at the time of the publication of this article.

💰 Takeaway

While not the cheapest, HYXF is the only fossil free corporate bond ETF on the market.

🔔 Interested in other green ETFs? Learn about green bonds.


Methodology

The ratings take into account the fund’s expense ratio, liquidity, FactSet’s fund closure risk (if available), whether the fund’s holdings reflect the sustainability mandate, ESG ratings from Sustainalytics and MSCI (if available), exposure to fossil fuels, and Fossil Free Funds rating (if available). To be included, the fund needs to have an ESG or sustainable mandate.