COLLEGE PLANNING | ESTATE PLANNING | INSURANCE | INVESTING | PORTFOLIO SPOTLIGHT | REAL ESTATE | RETIREMENT | TAX PLANNING
ESG Funds Meet The Skeptics
Investors are paying 20 % more for roughly the same portfolio as other funds , says a Harvard study . Experts weigh in .
By Ben Mattlin
ESG FUNDS ARE GETTING SLAMMED from all sides these days . For much of the last year , conservative politicians have blamed them for a host of problems ranging from high gas prices to virtue signaling with other people ’ s money .
After several years of stellar performance , thanks partially to heavy technology weightings , many funds in the environmental , social and governance category began struggling in 2022 . In March 2023 , it was reported that MSCI would downgrade the number of “ AAA ” -rated mutual funds and ETFs in the category from 1,100 to 54 .
Late last year , a Harvard study found that 68 % of the holdings in many mutual funds marketed with ESG standards were exactly the same as those in other broad-based funds outside the category . ESG investors were paying an average of 20 basis points more per year for investments that weren ’ t all that different , the researchers concluded .
The report added fuel to a debate that ’ s been raging for decades . Is socially responsible investing ( sometimes called “ sustainable investing ”) an overpriced marketing gimmick ?
‘ Investors Have Been Misled ’
“ You can own the cheapest S & P 500 ETF and get nearly the same return as the ESG funds for a fraction of the fees ,” says Mark Neuman , CIO and founder of Atlanta-based Constrained Capital , which was not connected with the Harvard study . “ Investors certainly have been misled into thinking they are getting a specialized ESG fund when in fact they ’ re just getting basic S & P exposure .”
Vanguard recently made headlines in January when it withdrew from a climate change alliance of asset management complexes . But Vanguard has seven ESG funds in the space , and they brought in nearly $ 2 billion in new money in 2022 , Morningstar said , making Vanguard the nation ’ s No . 1 ESG fund manager .
These vehicles can look a lot like their non-ESG counterparts . Apple , Microsoft Corp . and Amazon . com are the top three holdings of both Vanguard ’ s ESG U . S . Stock ETF and its non-ESG Total Stock Market ETF .
Granted , these three companies — all of which have been considered good corporate citizens at one time or another for their fair hiring practices and other policies — amount to 15.5 % of the ESG portfolio and only about 12.4 % of its non-ESG counterpart . But the ESG fund ’ s expense ratio is 0.09 %, while the non-ESG fund ’ s is only 0.03 %.
Investors Want ESG
To some ESG investors , though , the extra cost , particularly a paltry 6 basis points , doesn ’ t matter . They ’ re glad to find ESG options available from reputable vendors . “ We recognize that
MAY 2023 | FINANCIAL ADVISOR MAGAZINE | 49