7 Best Vanguard ESG Funds | ETFs and Mutual Fund Options | The Impact Investor

As a beginner, you can easily fall into impact hoaxes or invest in organizations with minimal growth potential. Unlike individual stocks, ESG funds can help mitigate this risk factor, earn good returns, and fulfill your moral responsibility.

Essentially, by purchasing ESG funds, you are not putting all your eggs in one basket. It is quite the contrary; the management system of the funds you choose will allocate your assets among a wide range of ESG-compliant options.

Even if one company from your chosen fund goes bankrupt or fails to meet ESG standards, your investment will still bring safe returns from other investments.

This way, you will not only create a hedge against market fluctuations but also have the opportunity to impact multiple sustainability areas at once.

To clearly define ESG funds, they include companies targeting three primary sustainable impact areas. Firstly, the environmental aspect promotes organizations striving for sustainable energy use, reducing harmful emissions, and better waste management.

Secondly, the social aspect brings companies that aim to achieve workplace equality and provide affordable healthcare, education, and housing.

Thirdly, governance includes organizations that thrive on ethical business practices, board diversity, and account transparency.

However, the rise in ESG investors has led to an increase in ESG funds, making a choice quite confusing. Read the following section to choose suitable funds for your investment.

How to Choose the Best ESG Funds?

Having the drive and motivation to invest sustainably is not always enough to ensure triple bottom line returns. Even if you know the benefits of socially responsible investing, you must ensure you invest in fulfilling these responsibilities while delivering timely returns.

You must pick the right ESG funds according to your investment potential and risk tolerance. You must analyze two options: actively managed and passively managed funds.

Active Vs Passive Funds

Strategically, actively managed funds try to beat the stock market performance, while passive or ESG index funds mirror or reflect a specific market index.

Looking at the cost perspective, actively managed funds charge a substantial management fee from investors as they require more regular trading activities.

If you’re confused or inexperienced in the area, you should seek proper investment counseling before choosing the ideal Vanguard ESG funds for yourself.

Other Considerations

Once you know the difference between actively and passively managed socially responsible investment funds, you should consider some factors before investing.

First and most importantly, you should decide which area you want to impact specifically through your investment. For example, if you want to target social impact above other options, go for funds that include companies targeting diversity and equality.

Similarly, ensure the exchange-traded funds you choose don’t overinvest your funds in particular industries or asset classes.

Besides that, proper research on the fund’s target impact must be conducted before investing. Understanding this will help you see whether your investment makes the difference you want.

You can do this by individually reviewing each company’s impact reports, checking gender diversity on the governing board, or monitoring the companies’ carbon footprint.

Some Vanguard funds even release their impact reports annually to help you track all the organizations involved through one document.

How to Assess Vanguard ESG Funds?

Vanguard investment website with financial data on screen — Dennis – stock.adobe.com

Now that you know what ESG funds are and what aspects to consider before investing, it is time to get to the meat of the matter.

After releasing its first ESG ETF, the FTSE Social Index Fund, in 2000, Vanguard has offered many investment options for savvy investors.

Today, its Social Index Fund is one of the most significant ESG-screened funds in the US. Similarly, all its other ESG fund options complement the investor’s portfolio while providing timely returns.

Most importantly, its ESG funds operate through strict, standardized criteria to avoid including non-compliant companies.

However, your choice will depend on your investment potential, portfolio, and risk tolerance. Before I list the best Vanguard ESG funds with their details, you’ll need to analyze this information to choose the ideal option.

Here are some aspects you should check in every option listed below to determine the right investment option with triple bottom-line returns.

Minimum Investment Limit

A crucial aspect to check to see whether the ESG fund fits your needs is the minimum investment limit. If you choose ESG mutual funds, you should expect to pay at least $3,000-$5,000 upfront.

While this might not sound like much to seasoned investors, beginners should know this to plan when selecting a Vanguard ESG mutual fund.

However, if you’re not ready to pay substantial amounts upfront, that doesn’t mean you cannot participate in Vanguard ESG funds. You can go for Vanguard ETF funds with no mandatory investment limitations. This way, you can participate in the fund with as much investment as you like and receive the dividends accordingly.

See Related: Best Climate Change Mutual Funds

Management Fees

When assessing the annual returns and growth of an ESG fund, the management fee is something most investors fail to consider. Even if the fund you choose promises to pay well over time, the management fee will eat up your returns quickly.

That’s why it is important to tally the amount you’ll pay as a fee with the speculated returns to get an idea of your investment fund’s overall benefit and costs. Actively managed funds usually charge higher management fees than passively managed funds.

For example, the Global ESG Select Stock Fund has the highest fee of 0.58% among all Vanguard ESG funds because it is actively managed. However, the higher management fee usually means excessive trading activity, which is beneficial for your portfolio in the long run.

But, if you choose to lower your investment expenses and earn steady returns over time, you can select passively managed options from the Vanguard ESG funds lineup. These index funds will cost you only 0.12-0.15% annually, much less than actively managed counterparts.

Financial Performance

Financial performance is crucial whether you go for the Vanguard environmental fund or the Vanguard socially responsible fund. After all, financial returns separate sustainable investments from philanthropy, and the best ESG fund isn’t one that has the most impact but doesn’t require you to compromise on returns.

Luckily, stock market statistics show that prominent Vanguard ESG funds, namely VFTAX, ESGV, and VSGX, have outperformed their non-ESG counterparts in the past years.

This is because meeting the ESG criterion requires substantial background research for every company. This leads to a better analysis of all its aspects than traditional investment research. Eventually, this ensures good returns for investors.

Remember, no investment is void of risks, and past statistics cannot accurately predict how stocks will perform in the future. However, it is good to do as much research as possible to take a calculated risk while choosing Vanguard ESG funds.

Best Vanguard ESG Funds

Now that you know the essential criteria for judging Vanguard ESG funds options, let’s start with the ultimate list.

1. Vanguard ESG U.S. Stock ETF (ESGV)

If you’re looking for an ESG fund that targets socially responsible behavior and efficient governance, ESGV is one of the best options in the US stock market. It is an index fund that holds around 1,500 stocks with small, mid, and large market caps.

This means plenty of room to diversify your investment by participating in this fund. Its strategy is basic but adequate; it aims to mirror the US stock market while excluding companies that do not meet the ESG criteria.

As for ESG investing, the US Stock ETF particularly avoids all companies involved in trading tobacco and alcohol. Similarly, it excludes companies generating revenue from weapons, non-renewable energy such as fossil fuels, and adult entertainment.

Besides that, if you want to influence gender equality and ethical workplace conduct, the fund does not invest in companies with controversial histories regarding these issues.

As a passively managed exchange-traded fund, the ESGV requires high upfront costs but charges minimal annual fees while targeting long-term asset growth.

2. Vanguard FTSE Social Index Fund (VFTSX)

Although the VFTSK holds only around 500 stocks from large ESG-compliant companies, it is among the highest-performing Vanguard ESG funds.

It uses a similar negative screening process like the abovementioned ESGV fund; only the criteria are much more rigid and concentrated in this case.

Another aspect differentiating it from the ESGV is that it is a mutual fund. However, both are passively managed and require a mandatory investment limit to participate.

The VFTSX works to avoid all companies dealing with non-renewable energy, weapons, and tobacco. Additionally, the fund reviews all investment options based on 300 different standards for ESG investing, which is essentially the reason for the low stock holdings.

Despite that, the VFTSX historical annual returns of approximately 18.3% alongside an annual expense ratio of 0.22% is pretty impressive. The best part is that the fund’s top holdings mainly consist of large companies such as Apple, Johnson & Johnson, and Microsoft.

Over the past five years, the Vanguard FTSE Social Index has outperformed the S&P 500 and 98% of funds with stocks in large companies.

See Related: Best Mutual Funds to Invest in Today

3. Vanguard Global ESG Select Stock Fund (VEIGX)

The Vanguard Global ESG Select Stock Fund, also known as VEIGX, is an actively managed mutual fund that includes stocks from US-based and international companies.

The fund focuses entirely on large market-cap stocks and reviews each company through its environmental, social, and corporate governance aspects.

While other funds from the Vanguard ESG lists use a negative screening process to avoid companies involved in unethical practices, the VEIGX conducts complete impact research for every participating company.

Consequently, the fund only includes around 40-50 well-known ESG-compliant companies that significantly impact specific areas of improvement. What’s more, the fund managers actively engage with the board members of every company on their list regarding ESG issues, which ensures reliable impact data.

So, if you’re looking for steady long-term returns while supporting companies with a legitimate positive impact, this fund is for you.

4. Vanguard Equity-Income Fund (VEIPX)

With an annual return of around 15.6% and 0.26% expenses, the Equity-Income fund is among the most attractive Vanguard ESG funds. It ranks higher than 95% of funds from its league and is a member of the Kiplinger 25.

Most importantly, the Equity-Income has outperformed S&P 500 since 2007 by investing in midsize-large company stocks with above-average dividend yields. Besides that, Wellington Management manages two-thirds of the fund’s assets, aiming to raise their total payouts over time.

Vanguard’s internal team also finds stocks with consistent earnings growth, good income statements, balance sheets, and effective management. All this ensures that your investment will be in good hands.

5. Vanguard Health Care Fund (VGHCX)

The showrunner, Jean Hynes, is the fund manager of the Vanguard Health Care Fund, which has a high sustainability rating for those who wish to invest for impact.

By capitalizing on innovative ideas such as drug research and development while focusing on established drugmakers, Hynes has ensured an annual return of 18.8% since 2013.

The fund has an expense ratio of 0.38% and owns companies in the healthcare sector. These include insurance companies, equipment manufacturers, and pharmaceutical companies. However, 60% of the fund’s stocks are in pharmaceutical and biotech firms.

Unfortunately, with Congress attempting to force companies to cut their drug prices, the fund’s one-year return lags behind 74% of other healthcare stock funds.

Nevertheless, it still ranks among the top 8% of health care funds and ETFs in the ESG sector.

6. Vanguard Information Technology ETF (VGT)

Vanguard’s Information Technology ETF is another member of the Kiplinger ETF 20. This technology-focused fund is the ideal choice for investors targeting social impact.

Some of its top holdings include Alphabet, Apple, and Facebook, all known for employee-friendly workspaces and environmentally friendly policies.

Additionally, nearly 80% of its holdings comprise large companies that dominate the tech arena, with its top 10 holdings making 55% of the fund’s entire asset value.

Furthermore, it ranks among the top 22% of global tech funds and has outperformed more than 21% of its contemporary tech firms in the last 5 years.

At a 0.10% annual cost, this stock ETF is an affordable option for beginning investors who want to invest in the growing tech market.

7. Vanguard S&P 500 Growth ETF (VOOG)

According to last year’s performance, the Vanguard Growth ETF is one of the fastest-growing stocks in the S&P 500 index. Its top holdings include Apple, Alphabet, and Microsoft.

With an annual expense ratio of only 0.15% and a 15.4% yearly return, the Growth ETF is one of the top ESG funds in its league. Unlike other funds on the list that focus on large-cap companies, the Growth ETF uses a mixed strategy to diversify its approach.

This means it holds a combination of stocks from small, mid, and large-cap companies while helping them improve their ESG impact.

Vanguard ESG Funds – Which is the Best?

In conclusion, the most attractive option among the top Vanguard ESG funds is the Vanguard Global ESG Select Stock Fund (VEIGX).

One of the very few actively managed mutual funds from the Vanguard line-up and concentrated and promoted only 40-50 companies to bring attractive returns with sustainable investing. What makes this fund one of the best options on the list is the managers’ direct involvement in the ESG policy-making sector.

This means that while ensuring good annual returns, the fund also provides a reliable impact report rather than negatively screening out companies with unethical practices.

So, by investing in the actively managed VEIGX, investors generate impressive returns and promote sustainable ESG practices and ESG integration.

However, the high management fee might be a drawback for some investors. In this case, the ESGV and the VFTSX are also reliable ESG fund options from the Vanguard lineup.

FAQs

Does Vanguard have any ethical funds?

Vanguard ethical funds are investment options that prioritize companies with strong environmental, social, and governance (ESG) practices. These funds aim to generate returns while promoting sustainable and responsible business practices. Vanguard offers a variety of ESG funds across different asset classes, allowing investors to align their investments with their values.

Does Vanguard have an environmental fund?

Is Vanguard a company that offers an environmental fund? Yes, Vanguard offers an environmental fund called the Vanguard Global ESG Select Stock Fund. This fund invests in companies that meet certain environmental, social, and governance (ESG) criteria, such as reducing carbon emissions and promoting sustainable practices.

Which Vanguard ESG is best?

Is Vanguard ESG best? Vanguard ESG funds are a group of mutual funds that invest in companies with strong environmental, social, and governance (ESG) practices. The best Vanguard ESG fund for an individual depends on their investment goals, risk tolerance, and personal values. Some of the most popular Vanguard ESG funds include the Vanguard FTSE Social Index Fund, the Vanguard ESG U.S. Stock ETF, and the Vanguard ESG International Stock ETF.

What are Vanguard ESG funds?

Vanguard ESG funds are mutual funds that invest in companies with strong environmental, social, and governance (ESG) practices. These funds aim to generate long-term returns while also considering the impact of a company’s actions on society and the environment. Vanguard ESG funds typically use a screening process to identify companies that meet certain ESG criteria, such as reducing carbon emissions or promoting workplace diversity.

7 Best Vanguard ESG Funds | ETFs and Mutual Fund Options