The pros and cons of vanguards new esg index ETFS

The pros and cons of Vanguard’s new sustainability ETFs

By Special to MoneySense on December 6, 2018
Estimated reading time: 3 minutes

The good news is the ETFs are dirt cheap. But some sustainable investors won't like what's in them.

Imagine my great joy when I saw the announcement that Vanguard had launched two new ESG index ETFs. For those who don’t know, ESG—Environmental, Social and Governance—refers to the three central factors in measuring the sustainability and ethical impact of an investment in a company or business. Vanguard is an absolute leader in the ETF world, but they sadly didn’t have any sustainability ETFs—until now. They launched two recently—ESG U.S. Stock ETF (ESGV) and Vanguard ESG International Stock ETF (VSGX).

I have some issues with their approach (you’ll see below), but they are—by a mile—the most diversified and the least expensive sustainability ETFs available today. Together, they make it very easy for investors to ‘do less evil’ with global stocks and now I need to update my Organic Couch Potato model portfolio.

What I like

They are dirt cheap. ESGV has an expense ratio (ie. annual fee) of 0.12%, while VSGX is a little more expensive at 0.15%. To put this in perspective, lots of sustainability ETFs cost around 0.5% while mutual funds charge about 2.25% in Canada.

They are incredibly diversified with companies large, mid, and small. ESGV has 1,254 companies inside and VSGX has 1,673 companies inside.

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They have an expanded negative screen that eliminates fossil fuel companies in addition to the regular ‘sin stocks’ like tobacco, weapons (including all guns), and adult entertainment. It seems to apply just to oil and gas and coal companies, but not to derivative industries like pipelines. I’m also happy to see that it excludes companies with poor diversity standards since there is a clear correlation between diversity and profitability.

What I don’t like

These ETFs won’t go far enough for many of my clients (including myself). There are still some companies inside that are a ‘thumbs-down’ for me from an ethical perspective. The most obvious ones are in the International one (VSGX).

For instance, Nestle, Enbridge, and TransCanada are all problem companies for me. There are lots more troublesome companies inside the ETFs, and these will vary person to person. My point here is that the methodology ignores major environmental issues like bottled water, fracking, and pipelines that are deal-breakers for me personally. Investors should look through the list of companies to determine if there are any deal-breakers for them.

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These ETFs are both traded in US dollars, which is a small headache for Canadian investors. It means they are less tax-optimal inside a TFSA or RESP, and people need to use Norbert’s Gambit in order to avoid the crappy currency exchange rate that you’ll otherwise get dinged by.

Still, I’m so very happy that these ETFs exist. It provides yet another option for sustainable investors and will hopefully force other ETFs to lower their management fees to compete.

Timothy Nash is an economist and expert on socially responsible investing, impact investing, and the green economy. He is also the lead researcher for the Ethical Market’s Green Transition Scoreboard research report and blogs as the Sustainable Economist at www.sustainableeconomist.com.