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Vanguard gets ethical with VESG and VEFI

ETF Watch - Oct 16, 2018

One does not need to go back far to remember a time where ethical investing was relegated to the fringes and considered an ideology that would impact investing performance. How times have changed, with one of Australia’s largest fund managers, AMP recently divesting out of all their investments in tobacco companies, as part of their new ethical framework.

We know ethical investing is here to stay when one of the world’s biggest fund managers Vanguard Investments decides to launch a range of ethical funds, with the Vanguard Ethically Conscious International Shares Index ETF (VESG) and Vanguard Ethically Conscious Global Aggregate Bond Index (Hedged) ETF (VEFI). Today we take a look at these new funds and see how they are investing with their ethical mandate.

What does an ethical mandate involve?

One of the biggest issues with ethical investing, is that individuals’ ethical and moral boundaries tend to differ. Whilst most agree that investing in weapons manufacturers fall outside their ethical boundaries, climate change deniers may not have concerns with investing in fossil fuel miners. Even those with concerns about climate change can have their boundaries tested, with the fossil fuel value chain, particularly in Australia broad, including banks who finance miners through the supermarkets who sell retail fuel for cars.

When we first took a look at ethical investing in Australia, the options were limited, with the funds available hitting only the most obvious topics, such as tobacco and weapons. Since then the options have broadened, with Betashares launching their Australian and Global Sustainability Leaders ETFs, which have a broader mandate. Below we’ll take a look at how the Vanguard options fit in the ethical spectrum.

Vanguard Ethically Conscious International Shares Index ETF (VESG)

VESG tracks the FTSE Developed ex-Australia ex Non-renewable Energy, Vice Products & Weapons Index.

The index excludes companies with significant business activities in:

  • Fossil fuels
  • Alcohol
  • Tobacco
  • Gambling
  • Military weapons
  • Civilian firearms
  • Nuclear power
  • Adult entertainment

More details of the specifics of these screeners can be found here.

This gives VESG a broader mandate than the UBS equivalent UBS IQ MSCI World Ex Australia ETF (UBW), which excludes only companies involved in Tobacco or the production of controversial weapons. However, has a much narrower mandate than Betashares Global Sustainability Leaders (ETHI) which includes positive screeners to only include ‘sustainability leaders’.

What is the underlying makeup of VESG?

The top 10 holdings of VESG include all the usual names, with the likes of Apple, Microsoft, Amazon, Facebook, Alphabet (Google) and Berkshire Hathaway all making up the top 10 holdings. Comparing VESG to Vanguard’s standard global equities ETF, Vanguard MSCI International Shares Index ETF (VGS), 7 of the top 10 companies are shared with each. Of VGS’ 1,577 total holdings, 1,252 (79%) are also shared by VESG.

From a sector makeup, VESG has a predictably lower weighting to Energy. This is offset by higher weightings to sectors like Financials and Health Care.

 

Region exposures of both VESG and VGS are fairly similar, with 64% and 67% allocation to North America respectively, and a 20% and 22% exposure to Europe.

Vanguard Ethically Conscious Global Aggregate Bond Index (Hedged) ETF (VEFI)

VEFI tracks the Bloomberg Barclays MSCI Global Aggregate SRI Exclusion Float Adjusted Index.

As the name suggest, VEFI invests in bonds. It has the same list of negative screeners as VESG, to exclude industries that do not meet the ethical criteria.

VEFI covers both government bonds and corporate bonds. Investments must be rated BBB- or higher by Standard & Poors or an equivalent ratings agency. VEFI is hedged to Australian dollars, removing exchange rate risks from the portfolio.

What are the costs?

VESG has management fees of 0.18% per annum, the same costs as the non ethical VGS ETF. VEFI has fees of  0.26% per annum, slightly higher than non ethicsal Vanguard Global Aggregate Bond Index Fund (VBND), which has management fees of 0.20% per annum.

More ethical options for investors

VEFI fills a gap in ethical investing for Australian investors, being the first Fixed Income ETF with ethical screeners. VESG joins a somewhat crowded list of ethical global ETFs, and sits in the middle ground as to how far it takes its ethical values, but at 0.18% per annum, is the lowest cost global ethical ETF available.

We welcome the expanding list of ethical ETFs, as investors demand more of these types of investments.

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