Vanguard’s Best ESG Funds
Vanguard has a total of 5 different ESG fund options. Five funds may not seem like much but Vanguard offers a lot of diversity with just these funds. These are some of the best Vanguard ESG funds.
Active vs. Passive Management
No discussion about mutual funds would be complete without talking about the active vs. passive management of funds.
Funds can be either actively or passively managed.
A passively managed fund just seeks to copy an index. The Standard and Poor 500, or S&P 500, is one of the most commonly tracked indices. This index includes the largest 500 companies that make up the U.S. stock market.
So a fund that tracks the S&P 500 index will include about 500 of the largest U.S companies in the stock market. Because this is a set-it-and-forget-it investing approach, passively managed funds tend to have lower fees.
By comparison, actively managed funds seek to outperform the market by more frequently buying and selling investments. Fees are typically higher because of the active investing style.
Mutual Funds vs. Exchange-Traded Funds
I’m not going to go too in-depth with the differences between mutual funds and exchange-traded funds (ETFs). For the sake of simplicity, let’s just say that both of these funds package together a lot of different investments like stocks and bonds into one place.
Using the example of a passive mutual fund that copies the S&P 500 index… That fund will hold about 500 different companies and when you buy into that one fund, you are just buying smaller fractions of companies like Apple, Walmart, and the 498 other companies that make up the fund.
Vanguard’s ESG Funds
Vanguard currently offers 5 different ESG-specific funds. There are some pretty big differences between each of these funds. I’m going to start off by just giving a brief overview of each one so let’s dive right in.
A quick disclaimer; I am invested in ESGV because I am a strong believer in ESG investing and because this fund is currently outperforming the market.
ESGV – ESG U.S. Stock ETF
ESGV is Vanguard’s ESG-focused U.S. stock market index fund. This fund holds 1,500 small, mid, and large market-cap stocks so it allows for plenty of diversification. Basically, ESGV seeks to copy the U.S. Stock Market but excludes companies involved in tobacco, alcohol, gambling, adult entertainment, weapons, and non-renewable energy.
This fund also excludes companies with controversial or unethical conduct as well as companies with poor gender and ethnic diversity practices. This is a passively managed exchange-traded fund.
VFTAX – FTSE Social Index Fund
VFTAX is up next because this fund shares a lot of similarities with Vanguard’s ESG U.S. Stock ETF. VFTAX uses a similar negative screening process to eliminate companies involved in non-renewable energy, weapons, and vice products like tobacco. This fund is more selective and only holds about 500 different stocks.
Both VFTAX and ESGV are passively managed index funds. The main difference between VFTAX and our last fund is that VFTAX is a mutual fund, not an exchange-traded fund. I’ll show why this is important later in this article.
VSGX – ESG International Stock ETF
VSGX is Vanguard’s ESG-focused International Stock ETF. Again, this fund uses a similar ESG negative screening process as the last two funds but is focused strictly on international stocks.
This fund includes small, mid, and large market-cap stocks from outside the U.S. VSGX holds 3,000 to 4,000 stocks and is an ETF and another passively managed index fund.
VCEB – ESG U.S. Corporate Bond ETF
If you are looking for an ESG-focused bond fund then look no further than VCEB. This Vanguard fund is made up of corporate bonds from 200-300 U.S. companies. Again, this fund follows the same ESG negative screening process as the previous funds and is also a passively managed exchange-traded fund.
VEIGX – Global ESG Select Stock Fund
The last fund on the list is pretty different from all the previous funds we talked about. VEIGX is an actively managed ESG-focused mutual fund that includes U.S. and international mid and large market-cap stocks. All of the previous funds used a negative screening process to filter out companies that did not meet appropriate ESG criteria.
Vanguard’s Global ESG Select Stock Fund is built from the ground up to review a company’s environmental, social, and governance practices alongside traditional financial investment analysis. The investment scale here is much smaller since this fund only includes about 40-50 companies.
The manager of this fund also actively engages with companies and has the ability to vote on your behalf at annual shareholders’ meetings on matters that may be specifically related to ESG issues.
That is just a quick overview of each of these funds but let’s see how they actually compare to one another as well as their benchmarks.
Vanguard Fund Comparison
Vanguard has made it incredibly simple to get started with ESG Investing. They may only offer 5 different ESG funds but I think this is perfect for investors who are just starting to invest using environmental, social, and governance criteria. This gives people the opportunity to start creating impact with their investments right away.
Four out of these 5 ESG funds are passively managed index funds. This makes a lot of sense since Vanguard was founded on passively managed index funds and that is what they do best.
I have included each of the indices that these Vanguard funds are based on in the table above. For example, Vanguard’s ESG U.S. Stock ETF is built from The Financial Times Stock Exchange Group’s US All Cap Choice Index. I am not going to go through these indices one by one because I think that would put most of you to sleep but I have included these in the references to this article.
Minimum Investment
There are two mutual funds on this list and these come with a $3,000 minimum investment. This is pretty standard for mutual funds but I still wanted to bring this up because that is no small amount of change. That being said, Vanguard’s other ESG funds are exchange-traded funds and don’t have a minimum investment requirement.
Going back to ESGV versus VFTAX; the most significant difference between these two funds is that VFTAX is a mutual fund that comes with a $3,000 minimum investment. ESGV does not have a minimum investment.
Fees
Fees can have a major impact on your returns over time so it is really important to consider the fees and expense ratios of your mutual funds and ETFs.The expense ratio is the annual administrative fee found in mutual funds.
When it comes to expense ratios, there is one major outlier within Vanguard’s ESG fund lineup. The Global ESG Select Stock Fund has the highest fees of all the ESG funds, with an expense ratio of 0.58%. BUT, this also makes sense since this is the only actively managed fund on this list.
Actively managed funds are always going to come with higher fees and expense ratios because hypothetically the manager of the fund is putting in additional work to manage the fund on your behalf.
The fees for Vanguard’s four passive index funds range between 0.12% and 0.17%. These expense ratios may not be the lowest in the industry but these are all still low-fee index funds. And you’ll find out next that it may be worth paying a slightly higher fee if you are seeing better overall performance from the funds you are choosing.
*Prices change often so this table is used for general reference purposes only.
Financial Performance
There is a pretty amazing trend among Vanguard’s indexed ESG funds. ESGV, VFTAX and VSGX have all outperformed their non-ESG equivalent benchmarks over the last year.
- The ESG International Stock ETF outperformed the Vanguard Total International Stock ETF by 2.22%.
- The FTSE Social Index Mutual Fund outperformed the Vanguard Total Stock Market Mutual Fund by 1.68%.
- And the ESG U.S. Stock ETF outperformed the Vanguard Total Stock Market ETF by 4.74%.
These are some pretty incredible results so let’s not gloss over this.
Vanguard’s ESG Stock ETF outperformed Vanguard’s Total Stock ETF by almost 5%!
These results are pretty amazing but not surprising. When you include environmental, social, and governance criteria into your research you are just looking at additional information you may not be seeing with traditional investment analysis. Better information just means you can make better decisions.
ESG investing looks deeper at both the opportunities and the risks within companies. So it’s really not all that surprising that these ESG funds outperformed their non-ESG counterparts.
Like any investment, of course, past performance does not guarantee future results. But these numbers are hard to ignore.
ESG Investing?
There are still a lot of people out there that believe ESG is a gimmick. So the next time someone tells you ESG investing is just a fad and you’re throwing your money away, point to some of these ESG funds.
In a few years, ESG investing is going to be an essential part of regular investment analysis.
What are your thoughts on Vanguard’s ESG fund lineup? Do you think that ESG funds will continue to outperform the market over time? Comment below and let’s start a conversation!
*Prices change often so this table is used for general reference purposes only.
