iShares MSCI USA ESG Select Is Rocking It

Funds that focus on sustainable stocks are killing it this year. Consider iShares MSCI USA ESG Select (SUSA), one of the Kiplinger ETF 20, the list of our favorite exchange-traded funds. Over the past 12 months, the ETF has gained 28.8%, which beat the 21.4% return of the S&P 500 index. It outpaced 84% of all ETFs that invest in large companies, too.

The MSCI USA ESG Select ETF holds stocks in companies that win the highest marks for environmental, social and governance factors. Scoring well involves much more than tree-hugging. Firms that shine in ESG terms tend to be mindful of their environmental impact, but they also treat employees, customers and their community well, and they have a diverse pool of ethical managers who are aligned with shareholder interests.

Over time, the thinking goes, these firms will perform well because such characteristics point to businesses that are well managed. MSCI USA ESG Select, the oldest ESG-focused ETF in the country, has a 15-year annualized return of 9.3%. That narrowly missed beating the S&P 500, by an average of 0.3 percentage point per year. (The fund has a 0.25% annual expense ratio.)

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But what’s noteworthy is that MSCI USA ESG Select held up better than the broad market during the recent bear-market sell-off, and the fund has rebounded faster since the market bottomed, too. “We found a resilience and a stability in ESG funds and indexes this year,” says Sarah Kjellberg, head of iShares U.S. sustainable ETFs.

The ETF, which holds 157 stocks, is designed to stay roughly in line with the sector allocation of its benchmark, the MSCI USA index. But the fund has some wiggle room, and that’s one reason it has done so well this year.

The ETF holds more of its assets in tech stocks than the broad market, for starters. Nearly 29% of the ETF’s assets are devoted to technology, compared with 25% in the S&P 500. The fund’s hefty stakes in Apple (AAPL) (4.8% of assets), cloud-based software company Salesforce.com (CRM) (3.2% of assets) and graphics-chip designer Nvidia (NVDA) (2.0% of assets), all of which have soared recently, have boosted the fund’s performance. MSCI USA ESG Select holds fewer financial stocks than the benchmark, too, which also helped. Those shares have been among the worst performers—second only to energy shares—in the broad market this year.

Interest in ESG funds is increasing. Kjellberg says the firm has seen record inflows of assets globally into its ESG funds over the past two years. Now more than ever, “investors consider ESG funds as core positions for their portfolio,” she says, instead of as a satellite position that focuses, say, on clean-energy stocks. “This is something new we’re seeing in terms of how investors are embracing ESG.”