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.

Key Takeaways

  • Impact investing securities have performed on par with the broader market over the past year.
  • The ETFs with the best one-year trailing total return are GRID, XLF, and SMH.
  • The top holdings of these ETFs are Eaton Corp. PLC, Class B shares of Berkshire Hathaway Inc., and sponsored ADRs of Taiwan Semiconductor Manufacturing Co. Ltd., respectively.

There are 70 distinct impact investing ETFs that trade in the U.S. with an ESG score of 7 out of 10 or higher from ETFdb.com, 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 performed on par with the broader market over the past year. The index has provided a total return of 34.6% compared to the S&P 500's total return of 34.9%, as of Aug. 16, 2021. The best-performing impact investing ETF, based on performance over the past year, is First Trust Nasdaq Clean Edge Smart Grid Infrastructure Index (GRID). We examine the best three impact investing ETFs below. All numbers below are as of Aug. 16, 2021.

First Trust Nasdaq Clean Edge Smart Grid Infrastructure Index (GRID)

  • Performance Over One-Year: 58.1%
  • Expense Ratio: 0.70%
  • Annual Dividend Yield: 0.74%
  • Three-Month Average Daily Volume: 37,986
  • Assets Under Management: $491.6 million
  • Inception Date: Nov. 17, 2009
  • Issuer: First Trust

GRID seeks to track the Nasdaq OMX Clean Edge Smart Grid Infrastructure Index, which gauges the performance of stocks within the grid and electric energy infrastructure sector. The ETF provides exposure to companies engaged in upgrading the electricity grid in the U.S. with newer, digitally connected "smart grid" technologies that help to generate cleaner and more efficient forms of energy. Companies in the fund are involved in areas such as operations and maintenance, storage, and the manufacture of electric meters, devices, and networks. The multi-cap fund follows a blended strategy, investing in a mix of both value and growth stocks. Its top three holdings include Eaton Corp. PLC (ETN), an Ireland-based multinational power management company; Schneider Electric SE (SU:PAR), a France-based manufacturer of electrical power products; and ABB Ltd. (ABBN:SWX), a Switzerland-based provider of power and automation technologies.

Financial Select Sector SPDR Fund (XLF)

  • Performance Over One-Year: 55.8%
  • Expense Ratio: 0.12%
  • Annual Dividend Yield: 1.50%
  • Three-Month Average Daily Volume: 51,806,004
  • Assets Under Management: $42.6 billion
  • Inception Date: Dec. 16, 1998
  • Issuer: State Street

XLF provides exposure to companies engaged in a wide variety of financial services, including insurance, banking, thrift and mortgage finance, real estate management and development, asset management, and more. Banks receive the largest allocation in the fund, followed by companies involved in capital market activity and insurance companies. It is focused on large-cap equities and follows a blended strategy of investing in both growth and value stocks. The fund's top three holdings include Class B shares of Berkshire Hathaway Inc. (BRK.B), a provider of insurance, utilities and energy, freight rail transportation, manufacturing, retailing, and other services; JPMorgan Chase & Co. (JPM), a multinational investment bank and financial services holding company; and Bank of America Corp. (BAC), a multinational provider of banking and other financial services.

VanEck Vectors Semiconductor ETF (SMH)

  • Performance Over One-Year: 54.2%
  • Expense Ratio: 0.35%
  • Annual Dividend Yield: 0.57%
  • Three-Month Average Daily Volume: 3,417,932
  • Assets Under Management: $6.0 billion
  • Inception Date: May 5, 2000
  • Issuer: VanEck

SMH aims to track the MVIS U.S. Listed Semiconductor 25 Index, which is designed to gauge the performance of companies engaged in semiconductor production and equipment. The ETF provides exposure to 25 of the largest companies involved in the production of semiconductors. Nearly three-quarters of its holdings are companies based in the U.S., while the rest of the fund is comprised of companies based in Taiwan, the Netherlands, and Switzerland. It follows a blended strategy, investing in a mix of both value and growth stocks of large-cap companies. The fund's top three holdings include sponsored American depositary receipts (ADRs) of Taiwan Semiconductor Manufacturing Co. Ltd. (TSM), a semiconductor manufacturer; NVIDIA Corp. (NVDA), a manufacturer of computer graphics processors, chipsets, and related multimedia software; and ADRs of ASML Holding NV (ASML), a Netherlands-based manufacturer of semiconductor equipment.

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 to 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.