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Vanguard Plans Its First Actively Managed ESG Mutual Fund

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Vanguard plans to introduce its first actively managed environmental, social and governance focused fund midyear. The Global ESG Select Stock Fund will be managed by Wellington Management Co., which manages many active Vanguard funds, with the goal of outperforming the FTSE All-World Index.

The fund will invest in approximately 40 stocks of companies that it believes have strong fundamentals, proven management teams and “exemplary longstanding ESG practices” with the intention of holding those stocks for “an extended period of time,” according to Vanguard.

Wellington, which currently manages more than $336 billion in stock and bond assets for Vanguard, will not only manage the new ESG-focused fund but also vote its proxy shares and oversee direct engagements with companies.

“That gets Vanguard off the hook,” writes Dan Weiner, editor of The Independent Adviser for Vanguard Investors and co-founder of Adviser Investments.

The Vanguard Global ESG Select Stock Fund will charge an expense ratio of 45 basis points for Admiral shares, which require a $50,000 minimum, and 55 basis points for Investor shares, which require a $3,000 investment.

Those fees are “cheap for active but premium to ESGV,” tweeted Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA, referring to the passive Vanguard ESG U.S. Stock fund, which charges 12 basis points.  

Vanguard has two other passive index-linked ESG funds: Vanguard FTSE Social Index Fund (VFTAX) and Vanguard ESG International Stock ETF (VSGX), which charge 14 and 15 basis points, respectively.

Those three passive funds follow an exclusionary screening process. The new Global ESG Select Stock Fund “will take a markedly different investment approach” and may at times “hold stocks that would be omitted by some exclusionary ESG strategies,” according to Vanguard.

Wiener expects the new Vanguard fund “will certainly find its adherents,” though he imagines that the the firm’s ESG-focused ETFs will gather “the bulk of assets that Vanguard attracts to the [ESG] space.”

Coincidentally the same day that Vanguard announced its plans for the new actively managed ESG mutual fund, DWS Group announced the launch of of new Xtrackers MSCI USA ESG Leaders Equity ETF (USSG), which expands its suite of ESG-focused ETFs. The others are the Xtrackers MSCI ACWI ex USA ESG Leaders Equity ETF (ACSG), the Xtrackers MSCI Emerging Markets ESG Leaders Equity ETF (EMSG) and the Xtrackers MSCI EAFE ESG Leaders Equity ETF.

The new ETF, developed in collaboration with Ilmarinen, Finland’s largest pension insurance company fund, provides exposure to large- and medium-cap U.S. companies with strong ESG performance relative to their sector peers and charges an expense ratio of 10 basis points.

Rosenbluth tells ThinkAdvisor that despite the proliferation of ESG ETFs, “money has not yet flowed” into them. “Investors have stayed more loyal to their more expensive mutual fund strategies. … The focus has been on the investment approach more than performance or fees unlike traditional active equity funds. But with the bar being lowered to now 10 basis points and likely not stopping there, we could see demand pick up.”

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