Original, independent, thought leadership
ryan-tang-273382

BlackRock Lowers Fees on Three Equity ESG Exchange Traded Funds (ETFs)

In a filing with the Securities & Exchange Commission as of August 4, 2017 BlackRock Fund Advisors recorded substantial reductions in the expense ratios applicable to two international equity oriented ESG Exchange Traded Funds. These ETFs included the iShares MSCI EAFE ESG Optimized ESG ETF (ESGD) and the iShares MSCI EM ESG Optimized ETF (ESGE)…

Share This Article:

In a filing with the Securities & Exchange Commission as of August 4, 2017 BlackRock Fund Advisors recorded substantial reductions in the expense ratios applicable to two international equity oriented ESG Exchange Traded Funds. These ETFs included the iShares MSCI EAFE ESG Optimized ESG ETF (ESGD) and the iShares MSCI EM ESG Optimized ETF (ESGE) whose expense ratios dropped from 0.40% or 40 bps to 0.20% or 20bps and from 0.45% or 45 bps to 0.25% or 25 bps–reductions of 50% and 45%.  A third fund, the domestic iShares MSCI USA ESG Optimized ETF (ESGU), also experienced a significant decline in its expense ratio from 0.28% or 28 bps to 0.15% or 15 bps, or a reduction of 46%.

Launched in June 2016 as the iShares MSCI EAFE ESG Select ETF and the iShares MSCI EM ESG Select ETF, the ETFs were renamed as of August 22, 2016. The funds have benefited from strong developed Asian and European equity markets performance as well as emerging markets performance during the 12-month interval to July 31, 2017.  The iShares MSCI EAFE ESG Optimized ESG ETF and the iShares MSCI EM ESG Optimized ETF gained 17.08% and 25.57%, respectively and have tracked their corresponding non-ESG indexes, either positively or negatively, within 1.1% or less.  See Chart 1.

ESGU was launched as of December 1, 2016 and has registered a gain of 11.62% during the 7-months through July 31, 2017 versus 11.86% for the underlying index.

Since their inception, ESGD, ESGE and ESGU have attracted $122 million, $74.5 million and $5.4 million, respectively. They are three of 56 sustainable ETFs funds that have garnered almost $6.0 billion in assets under management.  BlackRock’s fee reduction may be designed to accelerate their growth and improve their competitive position relative to Nuveen Fund Advisors’ recently introduced NuShares ETFs that are focused on similar market segments with their ESG tilts and expense ratios ranging from 35 bps and 45 bps.  Regardless, this is a positive development for sustainable investors, especially so since there only a few actively managed international and emerging market ESG funds with attractive attributes that combine sustainable practices, performance and cost.

By lowering their expense ratios to 28 bps, 25 bps and 20 bps, the fees fall into the lowest expense ratio category or first quartile for ETF funds whose expense ratios, based on an analysis of these as of July 31, 2017 adjusted for the new BlackRock fees, average 0.46% and range from a minimum expense ratio of 0.12% and a maximum of 0.95%. Expense ratios that fall into the lowest expense ratio category or first quartile extend from 0.12% to 0.335%[1].

The ESG strategies applicable to the three funds are described below.

iShares MSCI EAFE ESG Optimized ESG ETF (ESGD)

The Fund seeks to track the investment results of the MSCI EAFE ESG Focus Index, an optimized equity index designed to reflect the equity performance of companies that have positive environmental, social and governance (ESG) characteristics as determined by MSCI while exhibiting risk and return characteristics similar to those of the MSCI Market Cap Weighted Index.

The index excludes securities of companies involved in the business of tobacco and controversial weapons companies, as well as securities of companies involved in very severe business controversies (as determined by MSCI). After excluding firms that fall into these categories, MSCI then follows a quantitative process that is designed to determine optimal weights for securities to maximize exposure to securities of companies with higher ESG ratings, subject to maintaining risk and return characteristics similar to the index.  For each industry, MSCI identifies key ESG issues that can turn into unexpected costs for companies in the medium to long term. MSCI then calculates the size of each company’s exposure to each key issue based on the company’s business segment and geographic risk and analyzes the extent to which companies have developed robust strategies and programs to manage ESG risks and opportunities. Using a sector-specific key issue weighting model, companies are rated and ranked in comparison to their industry peers.

As of June 30, 2016, the MSCI Market Cap Weighted Index consisted of securities from the following 21 developed market countries or regions: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom. The index may include large- and mid-capitalization companies. Components of the index primarily include consumer discretionary, financials, healthcare and industrials companies.

iShares MSCI EM ESG Optimized ETF (ESGE)

The fund seeks to track the investment results of the MSCI Emerging Markets ESG Focus Index, an optimized equity index designed to reflect the equity performance of companies that have positive environmental, social and governance (ESG) characteristics (as determined by MSCI), while exhibiting risk and return characteristics similar to those of the MSCI Market Cap Weighted Index.

The index excludes securities of companies involved in the business of tobacco and controversial weapons companies, as well as securities of companies involved in very severe business controversies (as determined by MSCI). After these companies have been excluded from the universe of eligible securities, MSCI then follows a quantitative process that is designed to determine optimal weights for securities to maximize exposure to securities of companies with higher ESG ratings, subject to maintaining risk and return characteristics similar to the MSCI Market Cap Weighted Index.

For each industry, MSCI identifies key ESG issues that can turn into unexpected costs for companies in the medium to long term. MSCI then calculates the size of each company’s exposure to each key issue based on the company’s business segment and geographic risk and analyzes the extent to which companies have developed robust strategies and programs to manage ESG risks and opportunities. Using a sector-specific key issue weighting model, companies are rated and ranked in comparison to their industry peers.

As of June 30, 2016, the MSCI Market Cap Weighted Index consisted of securities from the following 23 countries: Brazil, Chile, China, Colombia, the Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Malaysia, Mexico, Peru, the Philippines, Poland, Qatar, Russia, South Africa, South Korea, Taiwan, Thailand, Turkey and the United Arab Emirates.

The index may include large- and mid-capitalization companies. Components of the index primarily include consumer discretionary, financials and information technology companies.

iShares MSCI USA ESG Optimized ETF (ESGU)

The fund seeks to track the investment results of the MSCI USA ESG Focus Index, an optimized equity index designed to reflect the equity performance of U.S. companies that have positive environmental, social and governance (ESG) characteristics (as determined by MSCI) while exhibiting risk and return characteristics similar to those of the broader, non-ESG oriented, MSCI USA Index. MSCI begins with the MSCI USA Index and excludes securities of companies involved in the business of tobacco and controversial weapons companies, as well as securities of companies involved in very severe business controversies (as determined by MSCI), and then follows a quantitative process that is designed to determine optimal weights for securities to maximize exposure to securities of companies with higher ESG ratings, subject to maintaining risk and return characteristics similar to the MSCI USA Index.

For each industry, MSCI identifies key ESG issues that can lead to unexpected costs for companies in the medium- to long-term. MSCI then calculates the size of each company’s exposure to each key issue based on the company’s business segment and geographic risk and analyzes the extent to which companies have developed robust strategies and programs to manage ESG risks and opportunities. Using a sector-specific key issue weighting model, companies are rated and ranked in comparison to their industry peers. The MSCI USA Focus Index may include large- or mid-capitalization companies. Components of the MSCI USA Focus Index primarily include financials, healthcare and information technology companies.

[1] Based on an analysis of 54 sustainable ETFs as of July 31, 2017.  Data source:  STEELE Mutual Fund Expert, Morningstar data.

YOU MAY ALSO LIKE
$99.99
PER YEAR

Premium Articles Access Priority Support 1 Fixed Price

Free Trial
30 Day

Access to All Data No Credit Card Required Cancel Any Time

9.99
Monthly

Access to Premium Articles Priority Support Save 25%


Sign up to free newsletters.


By submitting this form, you are consenting to receive marketing emails from: . You can revoke your consent to receive emails at any time by using the SafeUnsubscribe® link, found at the bottom of every email. Emails are serviced by Constant Contact

Research

Research and analysis to keep sustainable investors up to-date on a broad range of topics that include trends and developments in sustainable investing and sustainable finance, regulatory updates, performance results and considerations, investing through index funds and actively managed portfolios, asset allocation updates, expenses, ESG ratings and data, company and product news, green, social and sustainable bonds, green bond funds as well as reporting and disclosure practices, to name just a few.

A continuously updated Funds Directory is also available to investors.  This is intended to become a comprehensive listing of sustainable mutual funds, ETFs and other investment products along with a description of their sustainable investing approaches as set out in fund prospectuses and related regulatory filings.

Getting started

Many questions have surfaced in recent years regarding sustainable and ESG investing.  Here, investors and financial intermediaries will find materials that describe the various approaches to sustainable investing and their implementation.  While sustainable investing approaches vary and they have thus far defied universally accepted definitions, many practitioners agree that they fall into the following broad categories:  Values-based investing, investing via exclusions, impact investing, thematic investments and ESG integration.  In conjunction with each of these approaches, investors may also adopt various issuer engagement procedures and proxy voting practices.  That said, sustainable investing approaches will continue to evolve.

In addition to periodic updates regarding sustainable investing and how this form of investing is evolving, investors and financial intermediaries interested in implementing a sustainable investing approach will also find source materials that cover basic investing themes as well as asset allocation tactics.

Inesting ideas

Thoughts and ideas targeting sustainable investing strategies executed through various registered and non-registered sustainable investment funds and products such as mutual funds, Exchange Traded Funds (ETFs), Exchange Traded Notes (ETNs), closed-end funds, Real Estate Investment Trusts (REITs) and Unit Investment Trusts (UITs). Coverage extends to investment management firms as well as fund groups. 

Independent source for sustainable investment management company research, analysis, opinions and sustainable fund disclosure assessments