For 20 years, we’ve watched game show contestants struggle to get through all 14 questions on the TV show Who Wants to Be a Millionaire. In that time, only 12 players emerged victorious. You could try your hand at Millionaire for quick results, but investing in exchange-traded funds (ETFs) is a more reliable method of raising your net worth.
One forward-looking ETF to consider for your retirement portfolio is the iShares ESG Aware MSCI USA ETF (NASDAQ: ESGU).
Both ETFs and mutual funds give you quick access to a diversified portfolio. Choose a broad market fund and one share spreads your risk across hundreds of different stocks. That diversification will mean less volatility compared to owning a handful of individual companies.
ETFs do have extra advantages over mutual funds, however. To start, you can buy a single share of an ETF, while some mutual funds have minimum investment thresholds that can be several thousand dollars.
ETFs can also be more tax efficient. It is possible to incur taxable capital gains on mutual funds without selling shares, but that’s not typically the case with ETFs. As long as you hold onto your shares, you shouldn’t realize any capital gains. Note that both ETFs and mutual funds can produce taxable dividend income.
Why an ESG ETF?
ESG stands for environment, social, and governance. An ESG fund builds its portfolio with companies that are committed to sustainable business practices in those three areas. Examples of corporate ESG initiatives include:
Environment: Environmental initiatives focus on natural resource consumption and waste management. iPhone maker Apple (NASDAQ: AAPL) uses 100% renewable energy to power its stores, offices, and data centers. The company is also actively reducing its water consumption and carbon emissions.
Social: Social issues encompass community impact, workplace safety, and employee engagement, diversity, and training. One of Amazon‘s (NASDAQ: AMZN) social programs is a commitment of $700 million for the training and development of 100,000 employees by 2025.
Governance: Governance deals with board independence and structure, as well as executive pay, reporting transparency, and political activities. The board of directors for chipmaker NVIDIA (NASDAQ: NVDA) has 11 independent members out of 12. 18% of the independent members are female, and 25% of all Board members are underrepresented minorities. Board members serve one-year terms and are evaluated annually.
Many ESG programs deliver long-term returns in the form of lower energy costs, lower turnover, or more responsible executive compensation. But this doesn’t mean ESG companies are sacrificing performance in the near term. That is a fundamental aspect of ESG investing — solid ESG companies meet an investor’s financial and technical requirements today, even as they work toward a more sustainable future.
This is one reason ESG exposure fits nicely into your long-term retirement strategy. You will likely hold assets in your retirement account several decades into the future; it makes sense to own companies with a forward-thinking approach.
The numbers on iShares ESG Aware
The iShares ESG Aware MSCI USA ETF tracks the MSCI USA Extended ESG index. The index includes 347 large- and mid-cap, U.S.-based companies with positive ESG performance. The top holdings are mostly the same technology companies you’ll see in S&P 500 index funds: Apple, Microsoft (NASDAQ: MSFT), Amazon, Alphabet (NASDAQ: GOOG), and Facebook (NASDAQ: FB).
This fund mimics the risk and return characteristics of the broader market — which makes it an entry point of sorts for new ESG investors. The ESG screening, however, is less stringent relative to other ESG funds. For example, the index screens for five controversial business activities including tobacco, firearms, and thermal coal. But another iShares fund, the ESG Advanced MSCI USA ETF (NASDAQ: USXF), tracks an index that screens for 14 controversial activities.
The iShares ESG ETF is also a young fund, launched in 2016. Average annual return since inception is a strong 17.86%, and the fund’s expense ratio is 0.15%. Net assets total $16 billion.
The million-dollar path
Going forward, it’s unlikely this fund will continue to maintain that near-18% growth rate for an extended period. Assuming a more average growth rate of 7% to 8%, a $500 to $600 monthly contribution would get you to $1 million in 35 years.
The 35-year timeline obviously doesn’t compare to winning $1 million during a 30-minute TV show. But saving and investing has a more predictable outcome than Millionaire, particularly over the long term. It’s a wonderful thing to know you can reach the millionaire’s club without beating the odds or even phoning a friend.
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