What is ESGD? (Pros, Cons, and Strategies)

If you're focusing on sustainability and ethical investing alongside financial returns, the iShares ESG Aware MSCI EAFE ETF (ESGD) might be an essential tool in your portfolio. ESGD provides a way to invest in companies that meet environmental, social, and governance (ESG) criteria while still gaining exposure to international markets. In this blog post, we'll explore what ESGD is, alongside its advantages and disadvantages, and delve into some strategic ways to invest in it.

What is ESGD?

ESGD is an ETF that aims to track the MSCI EAFE ESG Focus Index. This index consists of international companies in developed markets that meet certain ESG performance criteria. The fund offers investors the ability to gain broad exposure to international stocks while aligning with ESG-related values.

Key Features of ESGD

• Broad Exposure: Includes large and mid-cap developed market equities, excluding the U.S. and Canada.
• ESG Criteria: Companies are selected based on their adherence to environmental, social, and governance practices.
• Integration of Financial and Ethical Values: Combines the pursuit of financial returns with ethical investing.
• Market Efficiency: Uses a market capitalization-weighted index to ensure significant market representation.

ESGD Composition

ESGD's portfolio covers a wide range of sectors and is diversified across various developed markets. Notable holdings include Nestle (Switzerland), Toyota (Japan), and ASML Holding (Netherlands). The ETF avoids companies with severe controversies and those involved in certain industries like tobacco, firearms, and fossil fuels.

Pros of ESGD

Alignment with Ethical Values

One of the biggest advantages of investing in ESGD is the alignment with ESG principles. This allows investors to put their money into companies that not only aim for profit but also focus on societal and environmental welfare.

Diversification

ESGD offers diversification across multiple geographic regions and industries, decreasing the risk associated with single-market investing. This broad exposure can lead to a more stable investment portfolio.

Better Risk Management

Companies that excel in ESG criteria are often less prone to regulatory fines, litigation, and reputational risks. This can lead to more stable long-term returns and better risk management for investors.

Competitive Expense Ratio

ESGD boasts a relatively low expense ratio of 0.20%, making it a cost-effective way to invest in ESG-compliant companies compared to other ESG-focused investment options.

Cons of ESGD

Exclusion of High-Growth Stocks

ESGD avoids companies that don't meet certain ESG criteria, which may include some high-growth stocks. This exclusion can potentially lead to lower returns compared to other ETFs not limited by ESG guidelines.

Limited to Developed Markets

While ESGD provides excellent international diversification, it focuses exclusively on developed markets. Investors looking for exposure to emerging markets will need to seek additional funds.

Potentially Lower Returns

Due to its exclusionary criteria, ESGD may sometimes underperform compared to broader market indices, especially during periods when less ESG-compliant sectors, like energy and tobacco, outperform.

ESGD Investment Strategies

Long-term Investment Strategy

ESG investing and ESGD, in particular, are well-suited for long-term investors who wish to combine ethical considerations with financial gains. By holding ESGD for an extended period, investors can potentially benefit from the compound effect, sustainability tailwinds, and reduced portfolio risks.

Sector Rotation Strategy

Investors may use ESGD as a core holding in their portfolio while using other ETFs or sector-specific funds to gain targeted exposure. For instance, complementing ESGD with a renewable energy ETF can amplify your alignment with environmental values.

Diversifying with Other ESG ETFs

To gain more complete exposure, consider diversifying within the ESG spectrum. For example, pairing ESGD with other ESG ETFs that cover US markets or emerging markets can provide a well-rounded, socially responsible portfolio.

Regular Rebalancing

Given the dynamic nature of the global markets and ESG criteria, regular rebalancing can ensure that your portfolio stays aligned with both your financial and ethical goals. This practice helps maximize returns and manage risk over time.

Final Thoughts

ESGD provides a compelling option for investors who are conscientious about ESG factors and want international exposure. While it has certain limitations in terms of growth stock exclusion and market coverage, its many benefits make it an excellent choice for long-term, ethically-minded investors. By incorporating ESGD into a diversified investment strategy, you can achieve a balance between financial returns and societal impact.

Overall, ESGD is a valuable ETF for anyone looking to incorporate ethical investing into their strategy while benefiting from international diversification and solid ESG screening processes.