IShares ESG Aware MSCI Emerging Markets ETF ESGE captures the composition of the emerging-markets universe and takes measures to control its active risk. But it is still exposed to emerging-markets-specific risks that may not be compensated over the long run.

This fund tracks the MSCI Emerging Markets Extended ESG Focus Index. The index uses an optimizer to maximize its exposure to stocks with high environmental, social, and governance ratings while keeping its expected tracking error to the MSCI Emerging Markets Index at around 1%. This is a tight constraint, so the fund's risk profile and long-term performance should closely match the benchmark. To further tether the portfolio to the parent index, the optimizer also places weighting constraints on the fund’s sector and country exposure, as well as its individual positions. These limitations prevent the portfolio from making large active bets on specific market segments or stocks. As a result, the fund may still hold stakes in companies that some ESG investors would rather avoid.

The resulting portfolio features about one fourth of the stocks in the parent index but with similar sector composition. Its sector exposures also do not stray far from its average Morningstar Category peer, save for a slight overweighting in financials stocks, as of February 2023. Its country weightings are similar to both the index and the category average; China receives the highest weighting at about 24% of the portfolio.

Given these similarities, the portfolio will still suffer from many of the geopolitical risks specific to emerging markets. The recent Russia-Ukraine conflict highlights such risk. Shortly after the invasion, MSCI removed Russian stocks from the fund’s target index and the fund marked its Russian allocation down to zero. Russian stocks represented 3.6% of the fund at the end of January 2022, so the impact on performance was somewhat muted.

The fund's low fee of 0.25% is its biggest advantage over category peers. It outperformed the category average by 12 basis points annualized from its 2016 inception through January 2024.

Analyst Rating

Emerging-markets exposure with mild ESG tilt.

Analyst

Lan Anh Tran

Nuvn PA Mun Val Shs of Benef Interest

Natural Resource Partners

Vodafone Group

Yum China Hlds

Gold Fields Ltd.

ALLETE

First Trust Multi Cap Value AlphaDEX Fund

Fisker

Associated Capital Group

Credicorp

This fund's tight tracking constraints mean its performance should closely resemble the MSCI Emerging Markets Index. It leans toward stocks with high ESG ratings but is still exposed to political risks and a growing concentration in the Chinese market. It earns an Average Process Pillar rating.

The fund switched from the MSCI Emerging Markets ESG Focus Index to the extended version of that index in late May 2018. The current index applies slightly stricter product involvement screens than the prior index.

Average

Process

The iShares equity index team earns an above-average People Pillar rating, a testament to the quality of its index-tracking capabilities. The team leverages BlackRock's industry-leading technology and a robust global infrastructure to consistently deliver tight index-tracking performance in all the global markets that it touches. Automated workflows and the team’s extensive supporting staff effectively minimize potential disruptions caused by personnel changes.

BlackRock's Aladdin platform performs most of the portfolio management tasks and helps ensure the team achieves precise index tracking. Experienced managers guide the team, stepping in for tasks such as dealing with index changes, rebalances, certain corporate actions, and trade approvals. Collaboration is key within BlackRock. All managers have access to a worldwide network of traders and peers that enhance the fund's day-to-day operations. BlackRock's global trading desk forms an integral part of this network. It taps into local markets to execute cost-effective transactions. An independent risk committee diligently oversees the fund's tracking performance, ensuring it remains within prescribed boundaries and further instilling confidence in the team’s approach to tracking an index.

Above Average

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

iShares MSCI EM ESG Optimized ETF

ESGE tracks an index of large- and mid-cap companies from emerging market economies. Stocks are selected and weighted for positive environmental, social, and governance characteristics while maintaining similar investment risk/return of the market.

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