SPDR S&P 500 ESG ETF: A Core S&P 500 ESG Fund (NYSEARCA:EFIV)

ESG investing has been a growing theme for many years, and while I find there to be numerous problems with the theme (most notably that it’s hard to precisely define environmental, social, and governance-friendly companies), there’s clearly continuous demand here. If you are intrigued by ESG investing, despite the challenges around clear definitions, then you may want to consider the SPDR S&P 500 ESG ETF (NYSEARCA:EFIV). This ETF tracks the S&P 500 ESG Index, which basically takes the ESG concept and filters out non-ESG-friendly companies from the S&P 500 itself.

The nice thing is that the fund’s methodology should make it tilt more towards the sustainability side of the investing equation, all while still having the performance characteristics largely of a core allocation to the S&P 500 itself. The fund has been around since 2020, and has gathered over a billion in assets since. The S&P 500 ESG Index this fund seeks to track measures the performance of widely held stocks with ESG characteristics and is constructed using the same index-construction methodology as the S&P 500 Index. The result is an index with similar characteristics and sector weights relative to its parent benchmark with that ESG focus. This is more an exercise of removing things, such as companies that have questionable labor practices, which sell tobacco, controversial weapons, etc.

A Look At The Holdings

The top holdings are exactly what you’d expect in an S&P 500 fund, ESG or not. Apple (AAPL) and Microsoft (MSFT) make up the two largest positions, making this a top-heavy fund with company-specific idiosyncratic risk.

Remember that this is an exercise in what NOT to include from an ESG methodology standpoint. And generally speaking, Tech companies which dominate market-cap weighted averages fit ESG criteria well.

Sector Breakdown

Speaking of Tech, the sector makes up 34% of the portfolio, roughly. Not a surprise, and still a concern in my view, given my personal negativity on the sector (I believe the valuations are far too high this late in the cycle to justify owning).

The key here is that the sector weightings in EFIV are kept at the same level as that of the S&P 500 Index, so that the investors can track the performance of the general market while aligning their investments with ESG values.

Peer Comparison

There are a ton of ESG-focused funds out there trying to get core allocation capital from investors. One fund that’s worth comparing EFIV against is the iShares ESG Aware MSCI USA ETF (ESGU), which tracks an index of US companies with good ESG profiles. Though both ETFs purport to offer broad exposure to sustainable investments, the funds’ underlying methodologies and holdings are different. This goes back to my point that different fund issuers have different definitions of ESG investing.

When we look at the price ratio of EFIV to ESGU, we find that EFIV has outperformed handily.

Why? This appears to more be a function of sector allocation. ESG has less Tech exposure than EFIV and more Health Care. Those two alone, from an under/overweight perspective, largely explain the performance differential. In other words, it has little to nothing to do with the ESG definition and more to do with the sector positioning overall.

Pros and Cons

On the positive side, this fund provides broad market exposure with an ESG tilt if that’s what you’re interested in. It’s an S&P 500 fund at its core, is diversified across various sectors and industries, and can serve as a core ballast to an equity portfolio, replacing the S&P 500 or other broad market proxy. In the very long-term, if you’re bullish on stocks, you can’t go wrong with this fund from a very basic level. And with an expense ratio of just 0.1%, it’s cheap.

The downside? Who in the world knows if the way the fund defines ESG is truly accurate. This goes back to my criticism earlier. Yes, you can have some comfort that it screens out certain companies that are obviously problematic, but unless one can clearly define with standardized definitions what an ESG-friendly company is versus one that’s not, you have no real idea of if what you’re seeking in the fund is in reality what you’re getting. In addition, EFIV can underperform if the companies it’s screening out end up having outsized returns in the future. Maybe that doesn’t matter to some diehard ESG investors, but it’s still worth considering.

Conclusion

Look – I think for ESG-focused investors, it’s fine. There’s nothing special here, and my criticisms can admittedly be applied to other ESG funds as well. Having said that, EFIV does offer broad market exposure and maintains comprehensive industry representation, without compromising the ESG ethos. By tracking the S&P 500 ESG Index, the EFIV provides a sustainable substitute ETF to the traditional broad market indices. Not a bad fund, and worth considering. Just know it may not be as pure of an ESG product as you might hope for.