The arena for exchange-traded funds (ETFs) adhering to environmental, social and governance (ESG) investing principles is close to welcoming one of the index fund universe's heaviest hitters. In a statement released Wednesday, Vanguard said that it has filed plans with the Securities and Exchange Commission (SEC) to introduce two ESG ETFs: the Vanguard ESG U.S. Stock ETF and Vanguard ESG International Stock ETF. Those funds would be the first ESG ETFs offered by Vanguard.
Vanguard, the second largest U.S. ETF sponsor behind only iShares, already offers an ESG index fund. The FTSE Social Index Fund has been around since 2000. Across various share classes, that index fund had $4.4 billion in assets under management as of May 31, according to Vanguard data. (See also: ESG ETFs Look to Catch Traditional Rivals.)
"The Vanguard ESG U.S. Stock ETF will seek to track the FTSE US All Cap Choice Index, a market-cap weighted benchmark comprising large-, mid- and small-cap U.S. stocks screened on specific environmental, social and governance criteria," according to the statement. Meanwhile, the Vanguard ESG International Stock ETF will follow the cap-weighted FTSE Global All Cap ex US Choice Index, which features ex-U.S. developed and emerging markets stocks.
There are nearly 70 ESG ETFs trading in the U.S. with a combined $7.16 billion in assets under management. While the population of the ESG ETF space is growing rapidly, $1.12 billion in assets are allocated to just one member of the group. The second and third largest ESG ETFs combine for about $1.23 billion in assets, indicating that a significant portion of the universe's assets are confined to just a small number of funds.
Vanguard has the potential to change that with its superior brand recognition, strong distribution channels and, of course, low fees. The Vanguard ESG U.S. Stock ETF and Vanguard ESG International Stock ETF will have annual expense ratios of 0.12% and 0.15%, respectively. Some established ESG ETFs already have matching fees, but the average annual expense ratio on ESG ETFs listed in the U.S. is around 0.44%. (For more, see: Fee Cuts Make Their Way to ESG ETFs.)
"In the development of the benchmarks, FTSE screens its broad domestic and international stock indexes and excludes stocks of companies in the following industries: adult entertainment, alcohol, tobacco, weapons, fossil fuels, gambling and nuclear power," according to Vanguard. "The construction methodology also screens the stocks of companies that do not meet certain diversity criteria as well as labor, human rights, anti-corruption and environmental standards defined by the U.N. global compact principles."
The Vanguard ESG ETFs are expected to debut in September. (For additional reading, check out: Top 5 ETFs for Impact Investing.)