An increasingly important investment criterion that many investors consider when determining what stocks to purchase involves ESG, or the environmental, social, and governance rating of a company. More and more investors want to do good while making money and they also want to avoid companies that do things the general public might consider problematic (at least as it relates to the environment, various social issues, and/or corporate governance policies).
The Vanguard ESG U.S. Stock ETF (ESGV -0.45%) was created to address this increasingly important criterion. When evaluating its overall performance, the exchange-traded fund (ETF) looks like it has the makings for a good core equity holding. Here's why.
What does Vanguard ESG U.S. Stock ETF do?
Vanguard ESG U.S. Stock ETF is, like most ETFs, just an index-tracking investment. The index here is the FTSE US All Cap Choice Index. The key factors for this index are that it avoids companies that are involved in "adult entertainment, alcohol, tobacco, cannabis, gambling, chemical and biological weapons, cluster munitions, anti-personnel landmines, nuclear weapons, conventional military weapons, civilian firearms, nuclear power, and coal, oil, or gas." Furthermore, it "excludes stocks of companies that do not meet certain labor, human rights, environmental, and anti-corruption standards" and companies that "do not meet certain diversity criteria."
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For an ESG-focused exchange-traded fund those are basically decisions that you would expect to see. Beyond that, the ETF is market cap-weighted, so the largest stocks make up the largest percentage of the fund's assets. And it has an expense ratio of 0.09%, which is fairly low for a pooled investment product. This is where things start to get a little more interesting.
How has Vanguard ESG U.S. Stock ETF performed?
The core comparison point for most broad-based ETFs will be the S&P 500 index. Vanguard ESG U.S. Stock ETF has actually done fairly well compared with the S&P, basically performing neck and neck with that benchmark over the past five years. Vanguard ESG U.S. Stock ETF has only been around since late 2018, so five years is the longest standardized period you can really compare.
For investors with an ESG focus, that's an impressive outcome. Effectively, you can track the market without having to give up much upside because of the ESG-influenced exclusions. The key here is that Vanguard ESG U.S. Stock ETF owns over 1,400 stocks. To give some perspective, Vanguard Total Stock Market ETF (VTI -0.35%) owns over 3,700 stocks while the S&P 500, as its name implies, owns roughly 500.
So Vanguard ESG U.S. Stock ETF's screens are pulling out a lot of stocks, but it makes up for that by still holding a huge number relative to the S&P 500. And that means it offers a huge amount of diversification despite the ESG focus. This is probably what has allowed the ETF to keep pace with the more focused S&P 500. It is also what investors looking for a simple ESG stock holding should want to see.
Probably not perfect, but still very good
With any rote index approach to something as complex as ESG investing, there are likely to be companies that slip through the cracks here. But this is a nuanced investment niche, and it is hard to please everyone. If you want to bias your investment approach in the ESG direction without having to do that hard work of picking all of your own stocks, Vanguard ESG U.S. Stock ETF's performance suggests that it could be just what you're looking for. Perfect? Perhaps not. But diversification appears to have taken this ETF a very long way.
