There are a plethora of options when it comes to ESG investment funds, but are they reliable? Check out the ultimate list from one of the best ESG investment firms in the US to pick the right option.
If you are one of the 90% of Millennials willing to invest your money responsibly, you have landed on the right page. You see, taking a single bottom line approach while making investments is a downright outdated concept.
Instead, recent stock market performances clearly show that companies targeting triple and quadruple bottom line approaches are outperforming traditional assets that focus solely on financial returns.
Meaning, with ESG investments, you can target morally correct objectives without compromising financial returns. But, with hundreds of ‘greenwashed’ companies and fluctuating ESG standards, it is quite challenging to pick which investment options to go for, especially if you’re a beginner.
In this case, you can go for ESG funds that distribute your money into various socially responsible investment opportunities. One of the most notable names when it comes to ESG funds is Vanguard.
Managing ESG funds for around 20 years, the firm has various mutual funds and ETFs for investors to choose from. Here’s a list of the best Vanguard ESG funds for you to consider.
Table of Contents
What Are ESG Funds?
Before I start listing the options, here’s an introduction to ESG funds for newbies. Typically, if you’re willing to invest sustainably, you start by looking for companies aligned with ESG standards.
ESG stands for environmental, social, and governance criteria upon which a company is tested for impact. However, looking for dedicated companies or individual stocks is not easy.
As a beginner, you can easily fall into impact hoaxes or end up investing in organizations with minimal growth potential. Unlike individual stocks, ESG funds can help you mitigate this risk factor and earn good returns along with fulfilling your moral responsibility.
Essentially, by purchasing ESG funds, you are not putting all your eggs in one basket. In fact, 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.
Now, 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 you will also have the opportunity to impact multiple sustainability areas at once.
To provide a clear ESG funds definition, they include companies targeting three primary areas of sustainable impact. Firstly, the environmental aspect promotes organizations striving for sustainable energy use, reducing harmful emissions, and better waste management.
Secondly, the social aspect brings in companies that aim to achieve workplace equality, provide affordable healthcare, education, and housing. Thirdly, the governance aspect works to include organizations thriving for ethical business practices, board diversity and accounts 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 make sure you invest to fulfil these responsibilities while delivering timely returns.
That’s why you’ll have to pick the right ESG funds according to your investment potential and risk tolerance. For this, you will have to 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.
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, make sure the ETF funds you choose don’t overinvest your funds in particular industries or asset classes.
Besides that, conduct proper research on the target impact of the fund before investing. Understanding this aspect will help you see whether your investment is making the difference you want.
You can do this by individually reviewing each companies’ impact reports, checking gender diversity on the governing board, or monitoring the companies’ carbon footprint. Some Vanguard ESG funds even release their own impact reports annually, to help you track all the organizations involved through one document.
How to Assess Vanguard ESG Funds?
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 pumped out many investment options for woke 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 work to compliment the investor’s portfolio while providing timely returns. Most importantly, its ESG funds operate through strict, standardized criteria to avoid the inclusion of any non-compliant companies.
However, the right choice for you 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 know how to analyze this information to choose the ideal option.
Here are some aspects you should check in every option listed below to figure out the right investment option with triple bottom line returns.
Minimum Investment Limit
A crucial aspect you should check to see whether the ESG fund fits your needs or not is the minimum investment limit. If you go for ESG mutual funds, you should expect to pay at least $3000-$5000 upfront.
While this might not sound like much to seasoned investors, beginners should know this so they can 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 that don’t have any mandatory investment limitations.
This way, you can participate in the fund with as much investment as you like and receive the dividends accordingly.
When assessing the annual returns and growth of an ESG fund, the management fee is something most investors fail to take into account. 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 fees of 0.58% among all Vanguard ESG funds because it is actively managed. But most of the time, the higher management fee 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, which is much less compared to actively managed counterparts.
Whether you go for the Vanguard environmental fund or the Vanguard socially responsible fund, financial performance is the most crucial aspect to consider. After all, financial returns are what separate sustainable investments from philanthropy, and the best ESG fund isn’t one that has the most impact but the one that 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.
The reason for this is that meeting the ESG criterion requires substantial background research for every company. This leads to a better analysis of all its aspects compared to traditional; investment research. Eventually, this ensures good returns for investors.
Remember, no investment is void of risks, and past statistics cannot accurately predict how the 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 according to which you should judge Vanguard ESG funds options, let’s get started with the ultimate list.
1. Vanguard ESG U.S. Stock ETF (ESGV)
If you’re looking for an ESG fund targeting socially responsible behavior and efficient governance, ESGV is one of the best options in the US stock market. It is an index fund by nature and holds around 1500 stocks with small, mid, and large market caps.
This means there is 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.
On the ESG front, the US Stock ETF particularly avoids all companies involved in trading tobacco and alcohol. Similarly, it also excludes companies generating revenue from weapons, non-renewable energy, and adult entertainment.
Besides that, if you want to influence gender equality and ethical workplace conduct, the fund does not put your investments into companies with controversial histories regarding these aspects.
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 different stocks from large ESG-compliant companies, it is one of the highest performing Vanguard ESG funds. It uses a similar negative screening process like the ESGV fund mentioned above; only the criteria is much more rigid and concentrated in this case.
Another aspect that makes it different from the ESGV is that it is a mutual fund. However, both of them are passively managed, therefore, require a mandatory investment limit to participate.
The VFTSX works to avoid all companies involved in dealing with non-renewable energy, weapons, and tobacco. Additionally, the fund reviews all investment options based on 300 different ESG standards, which is essentially the reason for the low stock holdings.
Despite that, the VFTSX promises a yearly return of 18.3% alongside an annual expense ratio of 0.22%, which is pretty impressive. The best part is, 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 S&P 500 and 98% of funds with stocks in large companies.
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 governance aspects.
While other funds from the Vanguard ESG funds list 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 have a significant impact in 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% with 0.26% expenses, the Equity-Income fund is one of 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 succeeded in outperforming S&P 500 since 2007 by investing in midsize-large company stocks with above-average dividend yields. Besides that, two-thirds of the fund’s assets are managed by Wellington Management, aiming to raise their total payouts over time.
Additionally, 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)
With the showrunner, Jean Hynes, as the fund manager, the Vanguard Health Care Fund 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 across the health care sector. These include insurance companies, equipment manufacturers, and pharmaceutical companies. However, 60% of the funds stocks lie 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 health care 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. Along with that, nearly 80% of its holdings make up 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 an 0.10% annual cost, this ETF is an affordable option for beginning investors targeting the growing tech market.
7. Vanguard S&P 500 Growth ETF (VOOG)
Among the S&P 500 index, the Vanguard Growth ETF has one of the fastest-growing stocks according to last year’s performance. Its top holdings include Apple, Alphabet, and Microsoft.
With an annual expense ratio of only 0.15% with a 15.4% yearly return, the Growth ETF is one of the top ESG funds from its league. Unlike other funds from 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?
Concluding my list of the best Vanguard ESG funds, I think the most attractive option among these top 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 sustainable returns to its investors.
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 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 revenue and promote sustainable ESG practices. 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.