State Street Global Advisors has launched a new ETF that offers a socially responsible alternative to the $290 billion SPDR S&P 500 ETF (SPY US), its flagship ETF, and the largest ETF globally.

EFIV offers an ESG alternative to SPDR S&P 500 ETF (SPY US), the largest ETF globally with over $290bn in assets,

The SPDR S&P 500 ESG ETF (EFIV US) has listed on NYSE Arca and comes with an expense ratio of 0.10%, slightly higher than SPY which costs 0.0945%.

The fund tracks the S&P 500 ESG Index which uses data from Sustainalytics to screen out firms from the bellwether S&P 500 Index that have poor environmental, social, and governance (ESG) profiles.

In the initial stage, companies with significant business activities linked to the tobacco and controversial weapons industries and those with weak adherence to the UN Global Compact Principles are excluded.

The remaining constituents are then assigned an ESG score based on SAM’s (formerly RobecoSAM) ‘Corporate Sustainability Assessment’. This score is either calculated directly by a company completing a comprehensive assessment (together with supporting documents), or – in the absence of this – by using publicly available information.

Those firms with the lowest ESG scores are removed whilst aiming to maintain 75% of the float-adjusted market capitalization of each Global Industry Classification Standard (GICS) Industry Group within the S&P 500.

The index is weighted by float-adjusted market capitalization and is reconstituted and rebalanced annually in April.

According to S&P Dow Jones Indices, the methodology provides an index that is aligned with socially responsible investing values while maintaining a risk-and-return profile similar to the parent index. It targets a tracking error of less than 100 basis points relative to the parent S&P 500.

SSGA is not the first firm to offer a socially responsible ETF based on the S&P 500. DWS got there first, having introduced the Xtrackers S&P 500 ESG ETF (SNPE US), which tracks the same index, in June 2019. This fund comes with an expense ratio of 0.11% and has accumulated $230 million in assets under management.

Given SSGA’s association with S&P 500-linked ETFs and the firm’s distribution capabilities in the US, it is perhaps likely that the SPDR S&P 500 ESG ETF will garner greater attention from investors seeking sustainable core US equity exposure.

The fund may also pique investor’s interest due to a growing body of research that points to ESG as a reliable driver of long-term outperformance. S&P Dow Jones Indices recently examined whether ESG could be a factor that outperforms by analyzing the returns of the S&P 500 ESG Index since its launch in January 2019. It found that the index produced slow, gradual outperformance over the S&P 500 with compelling information ratios.

Sue Thompson, Head of SPDR Americas Distribution at State Street Global Advisors, commented, “ESG investing is approaching a critical inflection point. The collective call for change is growing louder and investors are increasingly taking a stand through their investment choices. EFIV meets growing demand for cost-effective solutions that help put ESG investing into action by offering investors an ETF that seeks to track a more sustainable version of one of the most renowned benchmarks in the world.

“As ESG factor-based strategies pivot from check-the-box components to must-have ingredients in every portfolio, State Street remains committed to providing a broader range of ESG solutions.”

Dan Draper, Chief Executive Officer at S&P Dow Jones Indices, added, “S&P Dow Jones Indices has a longstanding relationship with State Street’s SPDR business that dates back more than 27 years, and we’re excited to expand this ongoing collaboration today. We’re delighted that State Street has licensed the S&P 500 ESG Index for its new fund, incorporating ESG factors into the core S&P 500 benchmark which is widely regarded as the best single gauge of large-cap US equities.”