IShares ESG Aware MSCI USA Small-Cap ETF ESML balances its mild environmental, social, and governance tilts with faithful representation of the small-cap market, though inherent issues to indexing small caps still loom. The fund earns a Morningstar Medalist Rating of Silver.

The fund tracks the MSCI USA Small Cap Extended ESG Focus Index. The index filters out companies involved in severe controversies or certain controversial businesses from its parent index, the MSCI USA Small Cap Index. An optimizer determines the weightings of the remaining securities. It systematically tilts toward firms with higher ESG scores while aiming for a 0.5% tracking error versus its parent index. Other constraints, including the holding- and sector-level weighting constraints against the MSCI USA Small Cap Index, keep the portfolio's composition close to its starting universe. Its sector makeup nearly mirrors that of the parent index and the category average, save for slight underweights in financial and industrials stocks.

Even though it only holds more than 1,000 firms from the 1,900-plus included in the MSCI USA Small Cap Index, the fund’s active share against the latter has typically remained low (below 30%). The fund tends to exclude mostly smaller stocks, and a substantial portion of its top holdings overlap with the parent index. This should help keep its tracking error in line, as these stocks are the main return drivers. The fund's realized tracking error against the MSCI USA Small Cap Index hovered around 0.85% from its 2018 inception through April 2023.

The fund inherits most of the diversification benefit from its broad, market-cap-weighted parent index and should track the performance of both the MSCI USA Small Cap Index and category average closely. Combined with a low fee, the fund should maintain a performance edge over the average category peers in the long run. The fund has outperformed both the category average and its parent index from its 2018 inception through April 2023. No clear performance pattern has emerged from its mild ESG tilts though; they have helped and hurt at different times during its short track record.

Analyst Rating

Small-cap exposure for socially conscious investors.

Analyst

Lan Anh Tran

Federal Realty Investment Trust

EMCOR Group

Casey's General Stores

Janus Henderson Group

TechnipFMC

MicroStrategy Incorporated

Acuity Brands

US Foods Holding

Comfort Systems USA

This well-constructed portfolio effectively offers modest ESG exposure in exchange for a small amount of active risk, earning it a Process rating of Above Average.

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 index equity team has endured some internal turnover at the top over the past few years. But index-tracking performance should remain tight, thanks to heavily automated processes, a large team of seasoned professionals, and several long-tenured managers who remain at the helm. Amy Whitelaw left the team in February 2023 for another role within the organization. Paul Whitehead replaced Alan Mason as a manager in January 2022, when Mason left to focus on the firm's customized institutional indexing capabilities. The broader index equity group, co-headed by Jennifer Hsui and Paul Whitehead, will continue to oversee iShares equity exchange-traded funds.

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.

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 ESG Aware MSCI USA Small-Cap ETF

ESML tracks an index of US small-cap companies with high environmental, social, and governance factor scores as determined by MSCI.

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Key Takeaways iShares ESG Aware MSCI USA Small-Cap ETF (ESML) earns a five-star rating from CFRA based on its low risk and high reward potential relative to US Core Equity peers. The portfolio consists of many appealing stocks based on our fundamental analysis, including Quanta Services (PWR) and Williams-Sonoma (WSM).

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