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

Investors around the globe are increasingly considering ethical and environmental impacts when choosing their investment portfolios. The iShares ESG Aware MSCI EM ETF, also known as ESGE, is an ETF designed for those who aim to invest in emerging market companies with strong environmental, social, and governance (ESG) performance. In this post, we will explore what ESGE is, discuss its advantages and disadvantages, and consider various strategies for including ESGE in your investment portfolio.

What is ESGE?

ESGE stands for the iShares ESG Aware MSCI EM ETF. It focuses on emerging markets and invests in companies based on their ESG performance.

ESGE tracks the MSCI Emerging Markets Extended ESG Focus Index, which aims to select companies that perform well on environmental, social, and governance criteria while still representing the performance characteristics of the broader emerging markets equity space.

Key Features of ESGE

• Companies are screened for significant controversies and involvement in areas like alcohol, gambling, tobacco, nuclear power, civilian firearms, and more.
• Companies with a market cap of at least $500 million.
• Companies must have a minimum trading volume, ensuring liquidity.

After applying the ESG criteria, the companies are weighted based on their ESG ratings while seeking to match the broad performance characteristics of the parent index, MSCI Emerging Markets Index.

ESGE Composition

ESGE includes companies from a variety of sectors and countries in emerging markets, such as Taiwan Semiconductor Manufacturing Company (TSM), Tencent Holdings (TCEHY), and Alibaba Group (BABA). The ETF is diversified across various industries but ensures each included company meets stringent ESG criteria.

Pros of ESGE

Ethical Investment

One of the primary advantages of ESGE is that it allows investors to align their investment choices with their values. By focusing on companies that adhere to strong environmental, social, and governance practices, investors can support businesses that are making a positive impact on the world.

Exposure to Emerging Markets

Emerging markets often offer higher growth potential than developed markets, as their economies are typically expanding at a faster rate. ESGE enables investors to gain exposure to this growing sector while also considering ethical investment criteria.

Diversification

ESGE provides diversification across various countries and sectors within the emerging markets. This diversification helps to mitigate risks associated with investing in a single market or sector.

Competitive Expense Ratio

ESGE has a relatively low expense ratio, which is crucial for long-term investors who want to minimize costs. The current expense ratio for ESGE stands at 0.25%, which is competitive compared to other emerging market ETFs and ESG-focused funds.

Cons of ESGE

Relatively New and Volatile Markets

Emerging markets can be more volatile than developed markets. Economic, political, and currency risks are generally higher, which can lead to greater fluctuations in the ETF's value.

Lower Dividends

Compared to other dividend-focused ETFs, ESGE’s dividend yield is relatively low. Investors looking for high yield dividends might not find ESGE appealing.

Potential for Narrow Exposure

While ESGE aims to provide broad exposure to emerging markets, the focus on ESG criteria can limit the number of investable companies, potentially resulting in a narrower scope of investments.

ESGE Investment Strategies

ESGE caters to investors who prioritize both financial returns and ethical considerations. Though not devoid of risks, several strategies can help investors maximize the benefits of investing in ESGE.

Long-term Investment Strategy

For those looking to capitalize on both the growth potential of emerging markets and the compound effect of ESG investing, a long-term horizon is essential. This strategy entails holding ESGE for a period of at least 10 years, which can help smooth out the volatility commonly associated with emerging markets.

Dollar-Cost Averaging

By consistently investing a fixed amount in ESGE at regular intervals, investors can mitigate the risks related to market volatility. This method, known as dollar-cost averaging, helps accumulate shares over time and lowers the average cost per share, especially in volatile markets like emerging markets.

ESG Integration in Portfolio

Investing in ESGE can complement other ESG funds or traditional ETFs in a diversified portfolio. By integrating ESGE, you can achieve ethical investment goals while diversifying your overall portfolio across different asset classes and regions.

Regular Review and Rebalancing

Regularly reviewing the performance of ESGE in your portfolio and rebalancing as necessary ensures that it continues to meet your investment objectives. Since emerging markets can be volatile, periodic assessment ensures the ETF aligns with your overall risk tolerance and investment strategy.

Conclusion

The iShares ESG Aware MSCI EM ETF (ESGE) is a promising option for investors who wish to combine ethical considerations with the high-growth potential of emerging markets. While the ETF offers several advantages, such as ethical investment, diversification, and a competitive expense ratio, it also comes with risks, including market volatility and lower dividends. By employing thoughtful investment strategies, ESGE can be a valuable component of a long-term, diversified, and ethically aligned investment portfolio.