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AGF Investment Inc.’s AGFiQ Global ESG Factors ETF holds several U.S. mega-cap technology stocks.

HAIM MAGIURA/iStockPhoto / Getty Images

Exchange-traded funds (ETFs) that focus on socially responsible investments have exploded in popularity in recent years, allowing investors to build a retirement nest egg that aligns with their values.

ETFs that use environmental, social and corporate governance (ESG) criteria to screen stocks have more appeal now because of the growing concern about the impact of climate change. Furthermore, the Black Lives Matter movement has also helped to highlight a lack of diversity in the work force and in corporate leadership.

In Canada, ESG ETFs have increased to more than 50 from only one – iShares Jantzi Social Index ETF (XEN-T) – five years ago. Keep in mind that the methodology these funds use can differ. Some ETFs track indexes that screen for companies with higher ESG ratings than peers, while others focus on excluding companies that don’t meet ESG criteria. And there are actively managed ETFs run by firms that have their own ESG stock-picking strategies.

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We asked three experts for their top ESG ETF picks to hold in a registered retirement savings plan (RRSP).

Daniel Straus, director of ETFs and financial products research, National Bank Financial Inc.

The pick: BMO ESG Corporate Bond Index ETF (ESGB-T)

Management expense ratio (MER): 0.17 per cent (estimate)

For long-term investors, this ESG corporate bond ETF can provide fixed-income diversification inside an RRSP, Mr. Straus says. “Corporate bonds tend to pay higher coupons than government bonds. And you also want the more heavily taxed assets [i.e., interest-bearing securities] in your RRSP.” Launched a year ago, this ETF tracks the Bloomberg Barclays MSCI Canadian Corporate Sustainability SRI Index, which excludes issuers involved with tobacco, adult entertainment, alcohol, gambling, weapons and nuclear power. Bonds offered by Toronto-Dominion Bank and CU Inc. are among the holdings. The weighted-average bond duration is about seven years. A sudden interest-rate hike is a risk, but unlikely in the shorter term, he says. The ETF’s fee, he adds, is “very cheap” versus 0.44 per cent charged by the non-ESG, iShares Canadian Corporate Bond Index ETF (XCB-T).

The pick: AGFiQ Global ESG Factors ETF (QEF-NE)

MER: 0.45 per cent

This global equities ESG ETF, which holds some U.S. mega-cap technology names, is suitable for long-term RRSP investors and smaller accounts that require diversified equity exposure, Mr. Straus says. The actively managed ETF is overseen by AGF Investments Inc.’s in-house team, which uses a proprietary, quantitative investment process to screen ESG-qualified stocks. Its tech weighting, which is about 24 per cent of the ETF, includes names such as Apple Inc. (AAPL-Q), Microsoft Corp. (MSFT-Q), Amazon.com Inc. (AMZN-Q), Facebook Inc. (FB-Q), Alphabet Inc. (GOOGL-Q) and Netflix Inc. (NFLX-Q). A market rotation out of pricey tech stocks into value-oriented names is a risk, but its portfolio managers maintain that the ESG screens provide for a higher-quality portfolio, he says. In an RRSP, foreign dividends may also be subject to a small withholding tax. The ETF’s fee is reasonable versus 0.47 per cent for the non-ESG, iShares MSCI World Index ETF (XWD-T), he adds.

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Ben Johnson, director of global ETF research, Morningstar Research Services LLC

The pick: BMO Balanced ESG ETF (ZESG-T)

MER: 0.20 per cent (estimate)

This balanced ETF is a compelling low-cost, one-ticket solution to build a diversified ESG-oriented RRSP portfolio, Mr. Johnson says. It holds six BMO ESG equity and bond ETFs that track MSCI indexes that focus on ESG leaders within their sectors, he says. “This is an [ESG] approach that we view favourably.” The equity portion, which makes up about 60 per cent of the fund, is invested in BMO MSCI USA ESG Leaders Index ETF (ESGY-T), BMO MSCI Canada ESG Leaders Index ETF (ESGA-T), and BMO MSCI EAFE ESG Leaders Index ETFs (ESGE-T). The balance is in government and corporate bond ETFs. Despite ultralow bond yields, fixed-income securities act as a ballast and a source of relatively, stable capital that can be used for rebalancing during market drawdowns, he says. Given that the non-ESG BMO Balanced ETF (ZBAL-T) charges the same fee, investors don’t pay a premium for the ESG screens, he adds.

The pick: iShares ESG MSCI EM Leaders ETF (LDEM-Q)

MER: 0.16 per cent

This U.S.-listed iShares ESG emerging-markets ETF can provide more diversification for investors holding BMO Balanced ESG ETF, which lacks developing-market exposure, Mr. Johnson says. There is no Canadian-listed ESG emerging-markets equivalent yet. Like the BMO ETF, the iShares offering uses the same MSCI strategy of choosing stocks with the highest ESG rating relative to sector peers. Holdings include Alibaba Group Holding Ltd. (BABA-N) of China and Reliance Industries Ltd. of India. This ETF is suited to younger or risk-tolerant investors because it holds higher-volatility stocks as well as stocks from countries where state-owned or state-influenced enterprises may not prioritize shareholders’ interests, he adds. The ETF’s fee is slightly higher than the 0.11 per cent charged by the non-ESG iShares Core MSCI Emerging Markets ETF (IEMG-A).

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Pavan Khaira, ETF and mutual fund analyst, Industrial Alliance Securities Inc.

The pick: BMO MSCI Canada ESG Leaders Index ETF (ESGA-T)

MER: 0.17 per cent (estimate)

This mid- to large-cap Canadian ESG ETF is suitable for investors who are in their asset-accumulation phase and can take on market risk inside an RRSP, Ms. Khaira says. Launched a year ago, the ETF tracks the MSCI Canada ESG Leaders Index, which takes a best-in-class approach to choosing firms with higher ESG ratings than their peers. The market-cap weighted index also excludes companies involved in tobacco, alcohol, gambling, weapons and nuclear power. Top holdings include Shopify Inc. (SHOP-T), Toronto-Dominion Bank (TD-T), Canadian National Railway Co. (CNR-T) and Enbridge Inc. (ENB-T). The ETF’s fee is also less expensive than the non-ESG iShares MSCI Canada ETF (EWC-A), which charges 0.49 per cent, she notes. As the BMO ETF is focused only on Canada, it is better for investors to own it as part of a well-diversified investment portfolio to reduce risk, she adds.

The pick: iShares ESG Canadian Aggregate Bond Index ETF (XSAB-T)

MER: 0.20 per cent

This Canadian government and corporate bond ESG ETF is an attractive, fixed-income option to help diversify an RRSP portfolio, Ms. Khaira says. The fund tracks the Bloomberg Barclays MSCI Canadian Aggregate ESG Focus Index, which holds issuers that manage their ESG risks better than peers. The index also excludes tobacco and firearm producers or distributors. The ETF, which launched last year, holds 40 per cent in Canadian federal government bonds and 36 per cent in provincial bonds. The corporate bonds include securities from issuers, such as Hydro-Quebec, Bank of Montreal and Telus Corp. The ETF’s fee is, “on average, lower than other ESG and non-ESG fixed-income ETFs,” she says. The risk for this ETF stems from “interest rate and credit risk similar to other fixed-income products.” Bonds in this ETF portfolio have an effective duration of more than eight years.

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