DWS has launched a pair of ETFs providing environmental, social, and governance-modified exposure to the US small- and mid-cap equity segments.
The funds track ESG versions of S&P Dow Jones Indices’ widely followed small- and mid-cap benchmarks, the S&P SmallCap 600 and S&P MidCap 400.
The funds, which have listed on NYSE Arca, are the Xtrackers S&P SmallCap 600 ESG ETF (SMLE US) and the Xtrackers S&P MidCap 400 ESG ETF (MIDE US)
They each come with an expense ratio of 0.15%.
Methodology
The funds’ underlying reference indices – the S&P SmallCap 600 ESG Index and S&P MidCap 400 ESG Index – are designed to closely replicate the risk and return profiles of their regular counterparts while providing a significant boost in ESG performance.
Companies involved in the production of controversial weapons, thermal coal, and tobacco are excluded as well as firms embroiled in ESG controversies and those that perform poorly in relation to the United Nations Global Compact Principles.
Constituents are then assigned ESG scores calculated by SAM, an ESG ratings firm recently acquired by S&P Global. ESG scores are based on SAM’s Corporate Sustainability Assessment which uses company-provided data, publicly available information, or a combination thereof.
Each index includes the companies with the highest ESG scores while targeting 75% of the market capitalization within each Global Industry Classification Standard (GICS) sector.
Constituents are weighted by float-adjusted market capitalization. Rebalancing occurs annually in April.
ESG footprint
In recent years, DWS has significantly expanded its footprint in the rapidly growing area of values-based investing. It now offers ten ESG-focused ETFs covering US, international developed, global ex-US, and emerging market equities, as well as US dollar corporate, high-yield, and emerging market sovereign bonds.
Notable successes include the $3.3bn Xtrackers MSCI USA ESG Leaders Equity ETF (USSG US) and the $450m Xtrackers S&P 500 ESG ETF (SNPE US).
Commenting on the new funds, Arne Noack, Head of Systematic Investment Solutions, Americas at DWS, said: “At DWS, we have made ESG-centric investing integral to our value proposition for our clients and the launch of MIDE and SMLE is a logical follow-on. We seek to provide investors with transparency around relevant ESG-metrics of a potential investment. Investors can, for example, easily view the reduction in carbon footprint of the underlying companies, compared to a non-ESG benchmark. This level of transparency is important for investors and intermediaries seeking credible ESG alternatives to mainstream equity indices.”
Amanda Rebello, Head of Passive Sales, US onshore at DWS, commented: “We are pleased to be the first in the industry to launch ETFs for the S&P MidCap and SmallCap ESG indices. With their competitive net expense ratios, the ETFs can be used as core portfolio building blocks.”
Mona Naqvi, Senior Director, Head of ESG Product Strategy, North America at S&P Dow Jones Indices, added: “We’re very pleased to collaborate with DWS as it launches these new ESG ETFs in the US. By representing the US mid- and small-cap equities market with improved sustainability profiles, the S&P MidCap 400 ESG and S&P SmallCap 600 ESG indices signify a new sustainable frontier in a space left largely untouched by sustainable indexing to date. As the first of their kind, these indices are poised to help raise reporting and sustainability standards among medium and small-sized companies as they seek to join the ranks of ESG indices. As such, ESG investing is no longer just a large-cap solution, it is now an all-cap solution.”
Comprehensive solution
The funds provide a more complete ESG solution than a comparable pair of products unveiled by BlackRock last year. Its iShares ESG Screened S&P Small-Cap ETF (XJR US) and iShares ESG Screened S&P Mid-Cap ETF (XJH US) are linked to first-generation, sustainability-screened versions of the S&P SmallCap 600 and S&P MidCap 400 that do not go beyond merely excluding companies from certain controversial industries. Collectively, the funds house just $25 million in assets, suggesting that socially conscious investors are seeking a more comprehensive ESG approach for their small- and mid-cap exposure, such as that now offered by DWS.