A growing number of investors are placing billions of dollars into socially responsible impact investing funds, which are also known as environmental, social, and governance (ESG) funds. These portfolios select stocks based on a company’s ESG practices, along with more traditional financial measures.
This has spawned a new family of exchange-traded funds (ETFs) that focus on investing criteria for the social good. These relatively new ETFs allow investors to achieve diversification while owning companies that follow specific ESG criteria.
- Impact investing securities have outperformed the broader market over the past year.
- The impact investing exchange-traded funds (ETFs) with the best one-year trailing total returns are FXU, PUI, and IHF.
- The top holdings of these funds are NRG Energy Inc., EQT Corp., and UnitedHealth Group Inc., respectively.
There are 56 distinct impact investing ETFs that trade in the United States with an ESG score of 9.5 or higher out of 10 from VettaFi's ESG screener, excluding inverse and leveraged ETFs, as well as funds with less than $50 million in assets under management (AUM). Impact investing securities, as measured by the S&P 500 ESG Index, have outperformed the broader market over the past year. The index has provided a total return of -6.5% compared with the S&P 500’s total return of -8.1%, as of Sept. 12, 2022. The best-performing impact investing ETF, based on performance over the past year, is the First Trust Utilities AlphaDEX Fund (FXU).
We examine the best three impact investing ETFs below. These ETFs are ones that have a high ranking according to VettaFi's ESG metrics, not ones that explicitly have an ESG goal in their prospectus. All numbers below are as of Sept. 12, 2022. In order to focus on the funds' investment strategy, the top holdings listed for each ETF exclude cash holdings and holdings purchased with securities lending proceeds except under unusual cases, such as when the cash portion is exceptionally large.
First Trust Utilities AlphaDEX Fund (FXU)
- Performance Over One-Year: 17.5%
- Expense Ratio: 0.64%
- Annual Dividend Yield: 2.13%
- Three-Month Average Daily Volume: 139,681
- Assets Under Management: $482.4 million
- Inception Date: May 8, 2007
- Issuer: First Trust
FXU is an exchange-traded fund that tracks the StrataQuant Utilities Index, a benchmark that selects utilities stocks from the Russell 1000 Index. Securities comprising this index are ranked separately based on growth and value factors. The fund's large exposure to the utilities sector provides companies with high dividend yields that tend to perform well during recessions. Over 62% of the fund's holdings are allocated to the electricity industry. Gas and water utilities and waste and disposal services are among the stocks that represent the remaining third of assets.
The top holdings of FXU include NRG Energy Inc. (NRG), an energy generation, distribution, and services company; Waste Management Inc. (WM), a waste management and environmental services company; and Republic Services Inc. (RSG), a waste disposal and recycling company.
Invesco DWA Utilities Momentum ETF (PUI)
- Performance Over One-Year: 13.3%
- Expense Ratio: 0.60%
- Annual Dividend Yield: 2.17%
- Three-Month Average Daily Volume: 12,839
- Assets Under Management: $92.4 million
- Inception Date: Oct. 26, 2005
- Issuer: Invesco
PUI is a multi-cap blended fund that aims to track the Dorsey Wright Utilities Technical Leaders Index, a momentum-based index of 30 securities from the NASDAQ US Benchmark Index. Securities are evaluated for relative strength, which is a measurement of one stock's performance compared with the performance of all other stocks in the same universe. Electric utilities make up the largest share of PUI's holdings at nearly 42%, followed by multi-utilities and gas utilities.
The top holdings of PUI include EQT Corp. (EQT), a hydrocarbon exploration and transport company; Xcel Energy Inc. (XEL), an electric and natural gas energy utility company; and Sempra Energy (SRE), an electric and natural gas infrastructure company.
iShares U.S. Healthcare Providers ETF (IHF)
- Performance Over One-Year: 7.3%
- Expense Ratio: 0.39%
- Annual Dividend Yield: 0.55%
- Three-Month Average Daily Volume: 58,537
- Assets Under Management: $1.6 billion
- Inception Date: May 1, 2006
- Issuer: BlackRock Financial Management
IHF tracks the Dow Jones U.S. Select Healthcare Providers Index, an index of U.S. healthcare provider companies. The fund focuses on companies that provide health insurance, diagnostics, and specialized treatment. Nearly 45% of the portfolio is allocated to managed healthcare companies, with healthcare services and healthcare facilities stocks making up the bulk of the remainder. IHF is heavily concentrated in a small number of names, with the top 10 holdings accounting for 72.5% of the portfolio.
The top holdings of IHF include UnitedHealth Group Inc. (UNH), a managed healthcare and insurance company; CVS Health Corp. (CVS), a healthcare company providing pharmacy, retail, and insurance products; and Elevance Health Inc. (ELV), a provider of medical, dental, pharmaceutical, and other related insurance plans.
The comments, opinions, and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or adopt any investment strategy. Though we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described in our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions, and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment, or strategy.