BlackRock has added to its offering of sustainable exposures with the launch of the iShares ESG MSCI USA Min Vol Factor ETF (ESMV US). The fund serves as an ESG counterpart to its $29 billion low volatility US equity ETF.
The ETF delivers the lowest volatility portfolio possible while meeting specific ESG objectives and adhering to certain diversification constraints.
The fund has been listed on Nasdaq and comes with an expense ratio of 0.18%, three basis points higher than its non-ESG equivalent, the iShares MSCI USA Min Vol Factor ETF (USMV US).
The fund is linked to the MSCI USA Minimum Volatility Extended ESG Reduced Carbon Target Index which selects its constituents from the parent MSCI USA Index universe of large and mid-cap stocks listed on US exchanges.
The methodology removes companies embroiled in severe ESG-related controversies as well as firms deriving significant revenue from business activities linked to controversial weapons, tobacco, civilian firearms, thermal coal, and oil sands.
The index then uses an optimization process to select and weight the remaining securities such that the resultant portfolio has the lowest possible volatility while satisfying certain constraints and meeting specific ESG-related objectives.
Diversification constraints include a cap on the weight of any individual stock of 1.5% and a cap on the deviation in any sector weight relative to its weight in the parent index of 5%. A limit of 10% on the maximum turnover allowed at any annual reconstitution controls for turnover-related trading costs.
The index’s ESG objectives, relative to the parent MSCI USA, include at least a 20% improvement in the weighted-average ESG score (based on MSCI ESG Research’s proprietary sustainability analysis), a reduction of at least 30% in total carbon intensity (based on Scope 1 and Scope 2 emissions data), and at least a 30% reduction in potential carbon emissions (defined as fossil fuel reserves per dollar of market capitalization).
As of the end of September, a quarter (24.4%) of the index’s weight was allocated to information technology stocks with the next-largest sector exposures being health care (18.8%), industrials (11.8%), consumer staples (10.5%), and communication services (10.2%).
As the ESG equivalent of the world’s most popular low volatility ETF, ESMV is positioned to benefit from the growing demand for responsible investment products. Whether it finds an immediate audience, however, remains to be seen.
The low volatility factor has been somewhat out of favour with investors lately with USMV experiencing more than $8.7bn in net outflows over the past 12 months on the back of underperformances versus the regular MSCI USA index.