Morningstar - Q3 2021 - 29

that includes two industry representatives. VanEck
uses a broad set of MSCI ESG ratings and also
screens out companies with high carbon emissions
relative to market capitalization.
The funds' Morningstar Sustainability Ratings
may capture some of these differences. The rating
is a measure of the financially material ESG
risks in a portfolio relative to a portfolio's peer
group; it is based on underlying company-level ESG
Risk Rating Assessments. The rating ranges
from 1 to 5 globes, with higher ratings indicating
that a fund has more of its assets invested in
companies that have lower ESG risk. Both
BetaShares Global Sustainability Leaders and
VanEck Vectors MSCI International Sustainable
Equity receive 5 globes. Vanguard Ethically
Conscious International Shares scores 3 globes.
Screens may also affect diversification by
reducing the investable universe. The Vanguard
offering stands out among the three funds,
with 1,608 holdings as of its most recent portfolio
date, far more than the BetaShares (200
holdings) and VanEck (142 holdings) ETFs. This
affects portfolio concentration: As the exhibit
shows, the Vanguard fund was less concentrated
in its top 10 holdings than the others.
There are sector differences to consider, too:
All three funds have over 50% in technology,
healthcare, and financial services, in part
TRENDS
Investors Piling Into Sector Funds Are Paying Up
Investors poured money into stock sector
funds in early 2021. Over $67 billion flowed into the
sector equity group in 2021 as of April 30,
outpacing flows into diversified U.S. equity funds.
The group encompasses a wide variety of
strategies, including both broad sector exchangetraded
funds like Financial Select Sector SPDR ETF
XLF and narrow thematic funds like Global X
Lithium & Battery Tech ETF LIT-two funds that
each had over $1 billion of inflows over this time.
Fees on sector funds vary just as widely. The SPDR
sector ETFs all carry 0.12% expense ratios,
while the narrowly focused Global X fund charges
a 0.75% expense ratio.
Sector fund investors aren't discriminating on
cost. Flows into diversified U.S. equity funds have
primarily gone to those with the lowest
expense ratios. In contrast, sector funds with
expense ratios in the 0.71%-0.80% range have
been just as popular as those with expenses
in the 0.11%-0.20% range. This reflects
two significant trends. One is the rise of trendy
thematic funds that seek to harness secular
growth themes. The second is the increased
adoption of actively managed ETFs, which usually
charge higher fees than passive strategies.
Katherine Lynch is a data journalist at Morningstar.
because exclusion screens remove most energy,
basic materials, and utility stocks. The
breakdowns vary significantly, however, as
shown in the exhibit.
Such differentiators may lead to performance
differences and affect the funds' roles as
diversifiers in a broader portfolio. As with the ESG
differences, investors' preferences will depend on
their goals. The Vanguard fund has one clear
advantage, though: Its 0.18% management fee is
about a third of its competitors'.
Lewis Jackson is a reporter and data journalist at
Morningstar Australia. He holds shares of ETHI and VESG.
Investors Are Less Cost-Conscious About Sector Funds Year-to-Date Flows by Prospectus Net Expense Ratio
Sector Funds
U.S. Equity Funds
114.14
Estimated Net Flow
$120B
60
90
14.67
14.41
30
-30
<0.11%
Prospectus Net Expense Ratio
Source: Morningstar.
0.11-0.20 0.21-0.30 0.31-0.40 0.41-0.50 0.51-0.60 0.61-0.70 0.71-0.80 0.81-0.90 0.91-1.00
>1.00
29

https://www.morningstar.com/articles/957266/the-morningstar-sustainability-rating-explained https://www.morningstar.com/articles/1039219/our-new-rating-measures-a-stocks-esg-risk https://www.morningstar.com/articles/1043427/are-you-overpaying-for-your-sector-fund https://www.morningstar.com/etfs/arcx/xlf/quote https://www.morningstar.com/etfs/arcx/xlf/quote https://www.morningstar.com/etfs/arcx/lit/quote https://www.morningstar.com/etfs/arcx/lit/quote

Morningstar - Q3 2021

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