Ethical investing continues to gain traction in Australia, with 9 in 10 Aussies expecting their portfolio to be invested responsibly.
Today, I’ll be comparing two of the more popular exchange-traded funds (ETFs) for ethical investors: the Vanguard Ethically Conscious International Shares Index ETF (ASX: VESG) and the BetaShares Global Sustainability Leaders ETF (ASX: ETHI).
Ethical criteria
The VESG fund uses an eligibility screen to exclude companies that have had severe controversies or material business activities in fossil fuels, nuclear power, alcohol, tobacco, gambling, and weapons.
Rather than merely excluding certain industries, ETHI takes a more active approach by selecting shares that are climate leaders. The fund excludes the same industries as VESG, in addition to industries operating in junk foods, environment destruction, human rights abuses, supply-chain concerns, and boards which lack diversity.
Of the remaining companies, the top 200 performers relating to the below questions will be admitted to the fund:
- Does the company have low total greenhouse emissions from operations?
- Does the company commercialise technology that has net positive climate benefits?
- Does the company have low involvement in the fossil fuel industry?
In summary, ETHI takes the cream of the crop, whereas VESG excludes the laggards.
Strategy and risk
Both ETFs include companies from a diverse range of international equity markets outside of Australia. As a result, I believe investors should be looking to hold each ETF for 5-10 years, to mitigate the risk of down years impacting performance.
ETHI is more concentrated with a basket of 200 companies, whereas VESG is wider-reaching holding over 1,600 companies. Common holdings between ETHI and VESG include Apple Inc (NASDAQ: APPL), Visa Inc (NYSE: V), and Tesla Inc (NASDAQ: TSLA).
Geographically, the United States is the largest market allocation, with both funds holding over 65% in the region.
ETHI is more tech-focused with 38.3% of holdings in Information Technology compared to 26.9% for VESG. The next three sectors – Consumer Discretionary, Financial, and Healthcare – have broadly the same allocations.
Performance
VESG has a one-year performance of 4.58%, and performance since inception (September 2018) of 10.11% per annum.
ETHI has performed more strongly, with a one-year performance of 16.74% and performance since inception (January 2017) of 20.62% per annum.
Management fees
VESG has a low management fee of 0.18%, the cheapest ethical international ETF on the Australian market.
ETHI has a management fee of 0.49% per annum, with the possibility to charge an extra 0.10% to cover expenses. This brings the maximum fee to 0.59%.
Size
ETHI has Funds Under Management (FUM) of $1.20 billion, compared to FUM of $208.81 million for VESG. Given the relatively large FUM of both ETFs, investors should have ample liquidity when buying and selling.
Which ETF comes out on top?
Despite both being coined ethical ETFs, the composition of ETHI and VESG differ greatly.
VESG seeks to exclude particular industries. Conversely, ETHI actively seeks companies who are leading the charge on climate action.
Personally, I prefer ETHI given its approach to selecting companies actively working to make the world more sustainable. Furthermore, ETHI’s management fee is justified by its superior performance relative to VESG.
To learn more about comparing ETFs, I’d recommend trying our Beginner’s ETF Investing Course. It’s free and will assist you with the fundamentals of ETF investing.
