Best ESG US Small Cap ETF in 2024
XJR vs ESML
Photo by Trent Haaland
ESG stands for environment, social, and governance. It’s been an investing theme since 2004 and has gathered more than $30 trillion under management according to Wikipedia.
Most of the money is invested in large companies, so-called large-caps. I showed in last week’s article that large-cap ESG investing can keep up with the broad market.
But there are small-caps, too, that are good corporate citizens.
Investing in smaller companies has paid investors a higher return in the very long term. That is likely to continue because investors need to be compensated for the additional risk that’s to be endured when investing in this part of the stock market.
This article compares two US small-cap ESG ETFs to see which one is best.
What’s going on here?
We’re comparing XJR with ESML, two ETFs that invest in the ESG space and select only US small-caps for their portfolio.
XJR
The iShares ESG Screened S&P Small-Cap ETF has existed since September 2020. It follows the S&P SmallCap 600 Sustainability Screened Index.
According to the index’s fact sheet, it excludes companies involved in controversial weapons, small arms, tobacco, and fossil fuels.
As of this writing on July 5, 2024, XJR has $73 million in assets under management. The three largest of its 615 holdings are Abercrombie & Fitch (ANF), Fabrinet (FN), and ATI (ATI). It charges an expense ratio of just 0.12%.
A hypothetical investment of $10K on its inception date (September 22, 2024) with dividends reinvested would have grown to almost $15.8K (after the ETF’s expenses but before taxes and other potential fees such as brokerage commissions or advisory fees), see the following chart.
Chart of the value of a hypothetical investment of $10,000 in XJR on 9/22/2020, according to Morningstar
ESML
The iShares ESG Aware MSCI USA Small-Cap ETF has been in existence since April 2018. It tracks the MSCI USA Small Cap Extended ESG Focus Index.
The index’s fact sheet states that the index “targets companies with high
ESG ratings in each sector. Tobacco, Controversial Weapons, Producers of or ties with Civilian Firearms, Thermal Coal and Oil Sands are
not eligible for inclusion.”
As of this writing on July 5, 2024, ESML has $1.6 billion in assets under management. The three largest of its 917 holdings are Casey’s General Stores (CASY), Janus Henderson Group (JHG), and KBR (KBR). It charges an expense ratio of just 0.17%.
A hypothetical investment of $10K on September 22, 2024 with dividends reinvested would have grown to a bit more than $15.3K (after the ETF’s expenses but before taxes and other potential fees such as brokerage commissions or advisory fees), see the following chart.
Chart of the value of a hypothetical investment of $10,000 in ESML on 9/22/2020 (not ESML’s but XJR’s more recent inception date, for better comparison), according to Morningstar
What does that mean?
Laying both ETFs into the same chart, you see that they correlate highly.
Chart of the value of a hypothetical investment of $10,000 in ESML and XJR on 9/22/2020, according to Morningstar
However, youth has a tad more energy:
XJR, since its inception, has outperformed its two-year older brother ESML.
The risk levels were comparable, by the way, with a 3-year standard deviation of 21.37% (XJR) and 21.11% (ESML).
Since both, the performance and expense ratio, are better, XJR looks preferable over ESML for the long-term investor who wants to invest in ESG-filtered US small-caps.
Why should you care?
ESG-screened small-caps have outperformed their broader market peers.
Comparing ESML from above (ESML instead of XJR because of its longer history) with IJR, one of the oldest and biggest non-ESG-filtered US small-cap ETFs (why IJR, see here), you can see the additional return in the following chart.
Chart of the value of a hypothetical investment of $10,000 in ESML and IJR on 4/10/2018 (ESML’s inception date), according to Morningstar
Investing with a conscience feels good and makes good karma. For the ESG-aware investor, this stance has paid off in terms of portfolio growth, too.
None of us knows what the future holds. But with our earth getting warmer and political and social issues boiling up, ESG small-caps outperforming their non-ESG counterparts may very well continue.
Thanks for reading.
Shine your light,
Cristof
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