Let’s be honest: Exchange-traded funds that focus on environmental, social and governance have been a giant dud. They only have about $6 billion in assets, or just 0.2 percent of all money invested in ETFs, despite to-die-for PR that eludes most categories.
It’s not like they don’t have big money management firms behind them. A good portion of the 50 ESG ETFs have been around for well over a decade and are issued by huge companies such as BlackRock Inc. with great distribution capabilities. So why is no one biting?
I’ve thought about this a lot and studied both hard and anecdotal data from an ETF perspective and have come up with five things that issuers of these funds could do to spark the kind of excitement that could lead to big flows.
1) Get cheap. Nothing attracts investors these days like fees, not even performance. This year, 97 percent of the net flows into ETFs have gone into products that charge 0.20 percent or less. The average ESG ETF fee is about 0.50 percent. There are a handful of ESG ETFs — most new — that are in the 0.15 percent to 0.20 percent range and — no surprise — they are the fastest-growing, with about $500 million in flows this year.
Vanguard Group Inc. is about to ratchet up the fee wars with a few ESG ETFs that will charge typical Vanguard-like levels of 0.12 percent and 0.15 percent. That will surely cause a bit of teeth grinding from existing issuers who may be forced to cut fees, but it will likely turn out to be just what the flow doctor ordered.
2) Get rid of “ESG.” I’m sorry, but ESG is not a great acronym. As shallow as this may seem, a killer buzzword is needed. Or at the very least, something that isn’t so bland. Not only is ESG confusing — even people in the financial industry don’t know or forget what it stands for — the phrasing isn’t very inspiring. It has none of the feel that such terms as “emerging markets” or “smart-beta” or “machine learning” have created with investors. Those terms communicate quickly while capturing the imagination.
Vanguard just launched an index fund in Australia using “ethically conscious” instead of ESG, which has some potential. Some others include sustainable investing, values-based investing, mission-related investing, and SRI — socially responsible investing. While none of those seems to have the pop necessary to catch on, it shows people are trying and recognize the problem.