IShares MSCI KLD 400 Social ETF's DSI focus on stocks' environmental, social, and governance attributes doesn't stop it from reaping many of the benefits of a broad market-cap-weighted index strategy. This cheap, sensibly constructed fund merits a Morningstar Analyst Rating of Bronze. 

The MSCI KLD 400 Social Index, which this fund fully replicates, weaves a market-cap-weighted, 400-stock portfolio that targets the best ESG companies from each sector. MSCI measures firms' ESG merit based on their exposure to relevant industry risks and opportunities, fitness to manage the risks and seize the opportunities, involvement in controversies, and corporate governance.

Market-cap-weighting confers several benefits. Large- and mid-cap stocks constitute most of this portfolio, and they tend to be priced accurately because they attract vast investor attention. By using stocks' prices to determine portfolio weight, the fund channels the market’s consensus opinion on each firm's relative value. Market-cap-weighting also reduces turnover and transaction costs, with help from flexible index buffers.

Whether strong ESG scores translate into long-term outperformance remains unclear, but these firms do tend to boast sound profits and healthy balance sheets. That bends the fund toward the quality factor, which has historically been tied to market-beating performance. 

This fund diversifies risk effectively at several turns. It mines the full value-growth spectrum for opportunities and pulls in some small-cap stocks. The portfolio is somewhat concentrated in the technology sector--its 31% portfolio weight was heavier than most peers' as of November 2022--but constraints guarantee that no one sector runs wild in the portfolio. This is an attractive trait because sector biases represent a source of active risk that the market may not reward.

Analyst Rating

An ESG fund with broad-market benefits.

Analyst

Ryan Jackson

Microsoft

NVIDIA

Alphabet

Tesla

Visa

Procter & Gamble

Mastercard

Home Depot

AbbVie

The MSCI KLD 400 Social Index prioritizes ESG merit but offers the efficiency and diversification of traditional market-cap-weighted strategies. The fund is poised to build on its stellar track record, meriting an Above Average Process Pillar rating.

The MSCI KLD 400 Social Index first excludes firms that derive revenue from activities like alcohol, gambling, tobacco, weapons, and fossil fuels. It selects mid- and large-cap stocks with the best ESG scores until each sector approximates its weight in the MSCI USA Index. All stocks earning the top ESG score automatically make the cut, irrespective of market capitalization. If all of the eligible mid- and large-cap stocks fail to round out 400 constituents or the prescribed sector allocation, the index adds the best-rated small-cap stocks until it meets those requirements.

MSCI scores companies' ESG merits on factors that are unique to their industries. For example, retailer Home Depot HD scores well because of its chemical safety and products' carbon footprints, while biotech firm Amgen AMGN earns credit for its product safety and toxic emissions and waste levels. The ESG rating considers firms' exposures to relevant industry risks and how prepared they are to combat them. Corporate governance and controversy are considered across all industries.

The index weights stocks by market capitalization, which leverages the market's collective view on each firm and promotes low turnover. Lenient index buffers also help curb turnover. The portfolio's annual turnover ratio has ranked in the Morningstar Category's best quartile in four of the past five years, so the fund should face minimal transaction costs.

Above Average

Process

BlackRock's industry-leading technology, global footprint, and extensive supporting cast earn an Above Average People Pillar rating. The team employs BlackRock's Aladdin platform to fulfill much of its portfolio management tasks, and global trading desks allow traders to conduct foreign transactions in a cost-effective way. 

The iShares team had some turnover over the past few years. But index-tracking performance should remain tight, thanks to heavily automated processes and several long-tenured managers that remain at the helm. Rachel Aguirre left the team in March 2021 after she was promoted to iShares head of product engineering. Paul Whitehead replaced Alan Mason as a manager in January 2022, when Mason left to focus on the firm's customized institutional indexing capabilities. Whitehead joins Greg Savage, Jennifer Hsui, and Amy Whitelaw, who will continue to oversee this fund and have helped manage iShares ETFs since the early 2000s. 

These managers interact with a wider team of traders and managers around the globe to execute the fund's day-to-day operations. The larger number of managers also limits the impact of personnel turnover when it does occur. A portion of their compensation is tethered to index-tracking performance, which aligns manager interests with those of the fund's investors.

People

BlackRock offers compelling options across asset classes and vehicles. It earns an Above Average rating for Parent. 
The firm’s approximately USD 8 trillion in assets under management, as of Sept. 30, 2022, gives it unparalleled scale and influence. It is a market-leading index fund provider globally, and its iShares exchange-traded fund franchise offers a low-cost lineup of core funds that investors can use to build a well-diversified portfolio for dirt cheap. The firm can be more adventurous in its ETF launches than some peers, so not everything it launches is appropriate for the masses. As a result, it is likely to have more ETF closures than peers that stick to the basic building blocks.  
The firm’s active fixed-income and multi-asset efforts also stand out as some of the best in the industry. Those benefit from BlackRock’s commitment to building a first-class risk management system via its Aladdin analytics software. The software is also available for sale to other firms and has proved to be a popular option for competitors, a testament to its usefulness. 
More recently, the firm has shifted its focus to ESG offerings and incorporating ESG across its investment lineup, leading to a political backlash in the United States.
BlackRock isn’t the best at everything it tries to do, but retail investors, financial advisors, and large institutions could all build robust portfolios using BlackRock’s products.

Parent

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DSI tracks a market-cap-weighted index of 400 US companies deemed to have positive environmental, social and governance characteristics by MSCI.

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