Xtrackers MSCI USA ESG Leaders Eq ETF | USSG |
by Lan Anh Tran
Xtrackers MSCI USA ESG Leaders Equity ETF USSG targets best-in-sector environmental, social, and governance leaders while retaining some of the benefits of a broad-market index strategy. However, its ESG mandate can add some active risk that might not be rewarded. The fund tracks the MSCI USA ESG Leaders Index, which targets large- and mid-cap US firms with strong ESG characteristics. After screening out companies involved in controversies and controversial businesses, the index ranks companies relative to their sector peers on ESG metrics. It adds top-ranking names until it covers 50% of each sector’s total market capitalization. Some sectors are more rife with ESG risks than others, which can lead to sector biases. However, its sector-neutral approach doesn’t make the type of sector bets that some of its ESG-oriented peers do. The index weights eligible constituents by market cap, which efficiently sizes positions and reduces turnover. It also prioritizes current constituents to further mitigate the impact of names that are prone to temporarily drift in and out of the portfolio. Together, these features create a well-diversified portfolio that has a similar composition to its parent index and the Morningstar Category average. The fund is still prone to some firm-specific risks. Many industry giants, who often receive large weightings in broad-market ESG-agnostic indexes, do not rank high enough in MSCI’s ESG metrics and are consequently excluded. Noticeably absent from this portfolio are major market leaders such as Apple AAPL, Amazon.com AMZN and Berkshire Hathaway BRK.B. Market-cap weighting will tilt the fund’s assets toward the remaining mega-cap stocks. This can lead to significant concentration in its top holdings. For example, its largest constituent, Microsoft MSFT, has consistently accounted for around 10% of the portfolio since inception. Nonetheless, the fund should maintain a performance edge over category peers with its still-broad and low-turnover portfolio over the long run. Its low 0.09% annual fee will also help preserve this advantage. |
Morningstar Pillars | |
Pessoas | Above Average |
Parent | Average |
Processo | Above Average |