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

In an era where awareness of environmental, social, and governance (ESG) issues is on the rise, ethical investing has caught the attention of many investors. SUSA, the iShares MSCI USA ESG Select ETF, offers an investment mechanism that aligns financial goals with responsible investing principles. Today, we'll delve into what SUSA is, its advantages and disadvantages, and some strategies for incorporating it into your portfolio.

What is SUSA?

SUSA is an ETF that tracks the MSCI USA ESG Select Index, which includes companies demonstrating strong ESG practices while maintaining a broad market representation.

Unlike traditional ETFs that simply focus on market performance, SUSA screens for companies excelling in ESG criteria. This unique focus makes it an ideal choice for investors who want to support businesses committed to responsible environmental practices, social equity, and robust governance.

Key Features of SUSA

• Companies with superior ESG performance as determined by MSCI's ESG scores
• Excludes companies involved in severe controversies or those primarily engaged in harmful activities such as fossil fuels, nuclear power, and tobacco
• Invests in diversified sectors while ensuring all included companies meet stringent ESG criteria

After applying the ESG filters, the index selects leading companies based on their market capitalization.

SUSA Composition

SUSA includes holdings in well-known companies like Microsoft (MSFT), Alphabet (GOOGL), and Procter & Gamble (PG). These are businesses that not only perform well financially but also lead in ESG criteria, encompassing a balanced mixture of technology, health care, consumer goods, and financial sectors.

Pros of SUSA

Ethical and Responsible Investing

One of the most compelling benefits of SUSA is its alignment with responsible investing. By including companies that demonstrate strong ESG practices, investors can support positive change while potentially earning financial returns.

Diversification

SUSA offers a diversified portfolio across various sectors, providing exposure to companies that meet high ESG criteria. This reduces risks associated with sector-specific downturns and enhances the overall stability of the investment.

Potential for Long-term Growth

Companies prioritizing ESG elements often show long-term growth and sustainability. Investing in SUSA can thus align with a long-term investment strategy aimed at capital appreciation and risk mitigation through ethical business practices.

Moderate Expense Ratio

The expense ratio for SUSA is 0.25%, which is fairly reasonable given the ESG focus and the specialized research involved in maintaining the ETF's disciplined approach to stock selection.

Cons of SUSA

Performance Linked to ESG Criteria

By focusing on ESG criteria, SUSA may exclude high-performing companies that don't meet these standards. This can sometimes result in the ETF underperforming compared to broader market indices in the short term.

Moderate Dividend Yield

SUSA is not designed to maximize dividend yield. Therefore, its dividend returns may be less attractive compared to other high-yield ETFs, making it less suitable for investors focused solely on income generation.

Relatively Higher Expense Ratio

While the expense ratio of 0.25% is moderate, it is higher compared to broad market ETFs like SCHD, which have much lower expense ratios. This higher fee is attributable to the costs associated with adhering to ESG criteria.

SUSA Investment Strategies

SUSA merges financial goals with ethical objectives, making it an excellent choice for long-term, mission-driven investing. Below are some strategies for integrating SUSA into your portfolio.

Long-term Investment Strategy

SUSA is best suited for investors with a long-term horizon of at least 10 years. Given the emphasis on companies with exemplary ESG practices, investors can expect a stable and potentially growing return over time. If your investment horizon is shorter, consider balancing SUSA with other high-performance ETFs to diversify your exposure.

Ethical Core Portfolio

For investors committed to ethical or sustainable investing, SUSA can serve as the core holding of your portfolio. By allocating a significant portion of your investment to SUSA, you ensure that the bulk of your portfolio aligns with ESG principles while still capturing broad market performance.

Complementary Investments

While SUSA has its strengths, it's essential to diversify further. Complement your SUSA holdings with allocations in sectors or ETFs not heavily weighted in SUSA to achieve better diversification and reduce portfolio risk.

Reinvestment of Dividends

Just like traditional growth investments, reinvesting SUSA dividends can significantly enhance your long-term returns. By choosing to reinvest, you can leverage the power of compounding, which is particularly beneficial for long-term investments.

Conclusion

SUSA provides a compelling option for investors interested in ESG investing, offering both ethical fulfillment and potential financial gains. While it has its drawbacks, such as moderate dividend yield and a higher expense ratio than broad market ETFs, its advantages can far outweigh these cons for the right investor. By adopting a long-term perspective and a well-thought-out strategy, you can make SUSA a valuable part of your investment portfolio.