The Best Vanguard ESG Funds (And One To Avoid) in 2021

Environmental, social, and governance (ESG) funds seek to invest in companies that do better on things like carbon emissions and shareholder rights. Vanguard offers five funds that promise to help you invest sustainably. Learn which one you should pick (and what to avoid).

SustainFi September 27, 2021

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Socially responsible investing with Vanguard

With over $8 trillion in assets, Vanguard is one of the world’s largest money managers. The company has pioneered low-cost, index-fund investing in the U.S.

Today, the firm also says that it cares deeply about climate change. Vanguard joined the Net Zero Asset Manager’s Initiative and is increasingly voting in favor of climate-related shareholder proposals (though its climate record is not without critics.)

Vanguard lets you invest in five ESG funds. Where the number of funds is concerned, Vanguard is behind its competitor, BlackRock, which has made more noises on climate and offers a mind-boggling line-up of 30 ESG funds.

Here are the five ESG funds from Vanguard:

  • FTSE Social Index Fund (VFTAX)
  • ESG U.S. Stock ETF (ESGV)
  • ESG International Stock ETF (VSGX)
  • Global ESG Select Stock Fund (VEIGX)
  • ESG U.S. Corporate Bond ETF (VCEB)

Vanguard ESG ETFs vs. Index Mutual Funds

Vanguard offers both exchange-traded funds (ETFs) and index mutual funds. Both types of funds invest in a collection of stocks or bonds.

Compared to mutual funds, ETFs are:

  • Generally cheaper and more tax-efficient
  • Easier to trade because they trade on exchanges like stocks
  • Have a lower minimum investment

Investors are increasingly choosing ETFs over mutual funds, attracted by lower cost and minimums. However, unlike other mutual fund managers, Vanguard offers very cheap mutual funds, so cost should not deter you.

Vanguard ESG mutual funds do have a $3,000 minimum investment. There is no minimum for Vanguard ETFs.

🔔 Read an in-depth guide to investing in ESG ETFs.

Passive vs. actively managed Vanguard ESG Funds

Vanguard is known for its passive or index mutual funds. Index mutual funds track an index like the S&P 500 or a more sustainable one. In contrast, actively managed funds hire a portfolio manager and a team of analysts who pick stocks and try to “beat the market.”

The fund needs to pay these professionals, so the cost of actively managed funds is higher. At the same time, studies suggest that actively managed funds are not able to “beat the market” after fees.

Although most Vanguard ESG funds are passive, they offer one actively managed ESG fund, the Global ESG Select Stock Fund (VEIGX). VEIGX costs 0.55% for the Investor Shares ($3,000 minimum investment.) Other ESG funds from Vanguard are passive and cost between 0.12% and 0.17% ($12 to $17 annually on a $10,000 investment.)

Exclusionary vs. integrated Vanguard ESG Funds

ESG investing strategies are not the same. Vanguard says its funds can be “integrated” or exclusionary. What does that mean?

Four out of five Vanguard’s ESG funds are exclusionary. They exclude “bad” companies. In Vanguard’s definition, these “bad” businesses are:

  • Owners of reserves of oil, coal, or gas
  • Alcohol, tobacco, gambling, or adult entertainment companies
  • Weapon manufacturers
  • Nuclear power companies
  • Businesses that do not meet diversity criteria
  • Companies that violate human rights and other standards defined by the UN Global Compact Principles

(The ESG bond fund has slightly different exclusionary criteria. They also exclude GMOs.)

Exclusionary funds are fine if you want to avoid certain harmful industries. (You may disagree whether nuclear power and other excluded sectors are really bad, though).

However, exclusionary funds don’t try to include businesses that are “good,” for example, clean energy companies. To fix that, Vanguard offers one inclusionary or “integrated” fund, the Global ESG Select Stock Fund (VEIGX). That fund has portfolio managers who add impact investments that “generate positive societal or environmental impact,” in addition to financial returns.

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Vanguard’s Five ESG Funds

Here is an overview of Vanguard’s five ESG funds:

FundInvestmentsExpense RatioAssets ($m)2021 Performance% Assets in Fossil FuelsMSCI ESG RatingSustainalytics Rating
FTSE Social Index Fund (VFTAX)U.S. stocks0.14%15,20019.7%0.6%A4 / 5
ESG U.S. Stock ETF (ESGV)U.S. stocks0.12%5,26017.8%0.7%A4 / 5
ESG International Stock ETF (VSGX)Foreign stocks0.17%2,590-0.8%1.6%AA2 / 5
Global ESG Select Stock Fund (VEIGX)U.S. and foreign stocks0.55%65715.5%2.7%AAA5 / 5
ESG U.S. Corporate Bond ETF (VCEB)U.S. bonds0.12%248-0.3%-A4 / 5

Data as of 9/27/2021

Vanguard FTSE Social Index Fund (VFTAX)

  • Mutual fund
  • Invests in U.S. stocks
  • Passive / index fund
  • Exclusionary ESG strategy
  • Expense ratio: 0.14% ($14 on a $10,000 investment annually)

VFTAX is a Vanguard index fund that invests in large-cap U.S. stocks and tracks the FTSE4Good U.S. Select Index. Established in 2003, this is one of the oldest and most popular ESG funds in the U.S.

The fund is cheap, and its performance has been similar to the S&P 500 in 2021, despite better ESG characteristics.

The fund invests in around 500 stocks, following an exclusionary approach. As described above, controversial industries like tobacco, fossil fuels, adult entertainment, alcohol, weapons, gambling, and nuclear power are excluded. The exclusion of fossil fuels is broad. VFTAX doesn’t invest in companies that own oil, natural gas, or coal reserves or are engaged in oil and gas exploration, transportation, or servicing.

Like most ESG funds and broad market funds, VFTAX owns a lot of big tech stocks. The top five holdings are Apple, Microsoft, Amazon, Alphabet (Google’s parent company), and Facebook.

VFTAX has strong ratings from ESG rating agencies MSCI and Sustainalytics.

Takeaway: VFTAX is a good default option for an ESG investor. Although the fund owns a lot of big tech stocks like Amazon (which some ESG investors find problematic), these are the stocks that generated a lot of the market’s returns over the past decade. If you avoid fossil fuels, VFTAX is also fossil free.

🔔 Want to learn more? Read an in-depth review of VFTAX.

Vanguard ESG U.S. Stock ETF (ESGV)

  • Exchange-traded fund
  • Invests in U.S. stocks
  • Exclusionary ESG strategy
  • Expense ratio: 0.12%

Launched in 2018, ESGV is an ETF investing in nearly 1,500 small, mid and large-cap U.S. stocks. The fund is cheap compared to other socially responsible ETFs. Unlike VFTAX, the fund invests in small and mid-sized companies too, so it lets you get exposure to the economy as a whole.

Like VFTAX, the ETF has an exclusionary ESG strategy, removing industries like fossil fuels, adult entertainment, alcohol, weapons, gambling, and nuclear power.

ESGV’s key sectors are tech, consumer, and healthcare stocks, and top holdings are Apple, Microsoft, and Alphabet (Google).

ESGV’s ratings are also good, with an A from MSCI and four out of five globes from Sustainalytics.

Takeaway: ESGV is a good default ESG investment alternative to VFTAX. It is slightly cheaper, easier to trade, and has a lower minimum investment (VFTAX requires a $3,000 minimum.) You will also get exposure to small and mid-sized U.S. companies.

Vanguard ESG International Stock ETF (VSGX)

  • Exchange-traded fund
  • Invests in international stocks
  • Exclusionary ESG strategy
  • Expense ratio: 0.17%

VSGX is an ETF that exclusively invests in foreign stocks. The fund is very diversified, holding 3,000 – 4,000 stocks at any given time. VSGX has an exclusionary ESG strategy, which is similar to VFTAX and ESGV. It doesn’t invest in fossil fuels, gambling, weapons, alcohol, tobacco, nuclear power, and businesses that don’t meet certain diversity or human rights criteria.

VSGX invests in both developed and emerging markets; emerging market stocks are about a quarter of the fund’s assets. The top three countries are Japan, China, and the U.K. China is over 10% of the fund’s assets.

VSGX ratings from ESG rating agencies are mixed. Despite high ratings from MSCI, it gets low ratings from Sustainalytics. (The lack of consistency has long been a problem for the emerging ESG industry.)

For an international ESG fund, VSGX is relatively cheap (0.17% annually.) Unfortunately, 2021 performance has been disappointing: the fund is down nearly 1%. This is mainly due to the sell-off in Chinese stocks driven by regulations from Beijing. VSGX holds popular Chinese stocks like Alibaba and Tencent.

Takeaway: VSGX is an OK choice if you want to add international ESG stocks to your portfolio. However, like other international funds, the fund is invested in China, which has been a problematic region in 2021. 

Make an impact with your money

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

Vanguard Global ESG Select Stock Fund (VEIGX)

  • Mutual fund
  • Invests in U.S. and international stocks
  • Actively managed
  • Integrated ESG strategy
  • Expense ratio: 0.55% (0.45% if you invest at least $50,000)

VEIGX is a new, actively managed ESG fund from Vanguard. The fund invests in 40-50 U.S. and foreign stocks with good ESG practices. The fund’s managers also engage with companies and vote at shareholder meetings on ESG issues. (The portfolio managers are actually employed by Wellington, another mutual fund manager. Both fund managers were previously research analysts at Wellington, and they have never managed a mutual fund before.)

Unlike other ESG funds from Vanguard, VEIGX is actively managed. As a result, it’s more expensive (0.55% annually), though still cheaper than most actively managed mutual funds (which cost around 1% annually.)

So far, returns have been good. In 2021 VEIGX beat its benchmark, the FTSE All-World Index, by over 1%. Since inception, the fund did almost 2% better than the benchmark. However, the track record is very short; VEIGX was launched in mid-2019.

In September 2020, VEIGX’s largest holdings were Microsoft, Visa, and drugmaker Merck. We did not spot any fossil fuels (except one utility), and the fund did invest in a few “green” stocks like clean energy utility Iberdrola and wind turbine manufacturer Vestas.

However, VEIGX is not a clean energy or cleantech fund. The fund doesn’t have to exclude fossil fuels, so it could invest in an oil company that is decarbonizing or investing in clean technologies. (In early 2020, the fund owned the French oil company Total, for example.)

Takeaway: Despite good performance to date and high ESG scores, we would pick other Vanguard funds over VEIGX due to its relatively high cost, a short track record, and many studies showing that actively managed funds don’t beat the market over time (despite charging higher fees.)

Vanguard ESG U.S. Corporate Bond ETF (VCEB)

  • Exchange-traded fund
  • Invests in U.S. bonds
  • Exclusionary ESG strategy
  • Expense ratio: 0.12%

VCEB is the only ESG fund from Vanguard that invests in U.S. bonds. The fund owns 200-300 bonds at any given time, excluding companies in controversial sectors like thermal coal, oil and gas, weapons, alcohol, gambling, tobacco, nuclear power, GMOs, and adult entertainment. The fund is cheap for an ESG bond fund (0.12% annually), though, like other bond funds, its performance has been lackluster in 2021. 

Takeaway: VCEB is a good option if you want to add ESG bonds to your portfolio. But don’t expect spectacular returns. 

Which Vanguard ESG fund is the best?

VFTAX and ESGV are good ESG default options for most investors. These funds are cheap and do not own fossil fuels. Both funds also have high ESG ratings, if that is important to you.

The Vanguard ESG fund to avoid

We would avoid VEIGX due to its relatively high cost and limited track record.


🔔 Learn about investing in other ESG ETFs.