Xtrackers MSCI USA ESG Leaders Equity ETF USSG targets best-in-sector environmental, social, and governance leaders while retaining some of the benefits of a broad-market index strategy. However, its ESG mandate can add some active risk that might not be rewarded. 

The fund tracks the MSCI USA ESG Leaders Index, which targets large- and mid-cap US firms with strong ESG characteristics. After screening out companies involved in controversies and controversial businesses, the index ranks companies relative to their sector peers on ESG metrics. It adds top-ranking names until it covers 50% of each sector’s total market capitalization. Some sectors are more rife with ESG risks than others, which can lead to sector biases. However, its sector-neutral approach doesn’t make the type of sector bets that some of its ESG-oriented peers do. 

The index weights eligible constituents by market cap, which efficiently sizes positions and reduces turnover. It also prioritizes current constituents to further mitigate the impact of names that are prone to temporarily drift in and out of the portfolio. Together, these features create a well-diversified portfolio that has a similar composition to its parent index and the Morningstar Category average.

The fund is still prone to some firm-specific risks. Many industry giants, who often receive large weightings in broad-market ESG-agnostic indexes, do not rank high enough in MSCI’s ESG metrics and are consequently excluded. Noticeably absent from this portfolio are major market leaders such as Apple AAPL, Amazon.com AMZN and Berkshire Hathaway BRK.B. Market-cap weighting will tilt the fund’s assets toward the remaining mega-cap stocks. This can lead to significant concentration in its top holdings. For example, its largest constituent, Microsoft MSFT, has consistently accounted for around 10% of the portfolio since inception. 

Nonetheless, the fund should maintain a performance edge over category peers with its still-broad and low-turnover portfolio over the long run. Its low 0.09% annual fee will also help preserve this advantage.

Analyst Rating

A broad-market portfolio of ESG leaders from each equity sector.

Analyst

Lan Anh Tran

Microsoft

NVIDIA

Alphabet

Eli Lilly

Visa

Tesla

Mastercard

Procter & Gamble

Johnson & Johnson

Xtrackers MSCI USA ESG Leaders Equity ETF delivers a portfolio of ESG leaders while maintaining many of the benefits of a broad-market index fund, earning an Above Average Process rating.

Above Average

Process

Xtrackers’ strengthening global index portfolio management operation supports a People Pillar rating of Above Average.

Most Xtrackers funds are domiciled outside the US, where the team that manages them has made significant strides. Julien Boulliat leads the group, a 20-person outfit spread across London, Frankfurt, and Hong Kong. This group is lean but not overburdened, a testament to its collective expertise and Xtrackers’ investment in top-flight technology. These factors may have contributed to the solid retention rate among senior-level investment professionals.

The US team is not quite as robust as its foreign counterpart. It has weathered more personnel turnover in recent years, and named portfolio managers draw on just a pair of associate portfolio managers. That said, the team has delivered on its number-one objective to produce high-fidelity index-tracking. Plus, Xtrackers has concentrated on globalizing the team, a focus that only stands to benefit the US organization.

People

In the past two years, DWS has been under heavy scrutiny from the SEC and German authorities owing to greenwashing allegations that were initially raised in August 2021 by the firm’s former chief sustainability officer Desiree Fixler. The SEC announced on Sept. 25, 2023, that it has fined DWS USD 19 million for failing to implement procedures to ensure that all investment staff members were following its environmental, social, and governance policies. This relates to funds where ESG factors were analyzed alongside other financially material factors, but where managers retained discretion over ESG outcomes. In addition, the firm was ordered to pay USD 6 million for deficiencies in its anti-money-laundering processes that were uncovered in a separate investigation. The investigation by the German authorities into the firm's ESG disclosures is still ongoing.  
The SEC findings underline that despite strong senior management commitment, it takes a considerable amount of time and resources to embed sustainability across all levels of an organization for firms without a long-standing sustainability heritage. Overconfidence and failure to deal with internal criticism adequately appear to have contributed to DWS' misleading statements on ESG matters. While it's difficult to quantify the financial damage to clients and no misstatements were detected in financial disclosures or prospectuses, we believe the firm’s shortcomings have the potential to adversely affect investor outcomes. Hence, we welcome DWS' efforts to strengthen governance around ESG integration and communicate more conservatively about its ESG capabilities.
Questionable and unsteady leadership has contributed to the DWS' woes. Previous CEO Asoka Woehrmann, who had spearheaded the firm's ESG push, stepped down in June 2022 as a result of the ESG investigations. His credibility had already been harmed following his use of personal email for business purposes and a large payment made to him by a client when he was head of Deutsche Bank's private-client business before being appointed as DWS' CEO in 2018. His successor Stefan Hoops is the firm's sixth CEO in the past 10 years, highlighting the instability in the firm's top leadership. This appointment also shows the continued influence of its parent company, even after the partial IPO in 2018. Hoops has spent most of his career at Deutsche Bank but has no asset-management background.
Despite all these negative headlines and shaky leadership, DWS has managed to remain quite stable in its investment ranks. The firm has also made strides to gain greater independence. For example, since 2020, bonuses have been linked to the firm's own performance rather than to that of the bank as a whole, which supports alignment and talent retention. Variable remuneration takes into account performance of up to five years.
DWS' vast fund lineup covers all asset classes, including passive strategies, which are offered under the Xtrackers brand. Many offerings don't distinguish themselves, but there are genuine areas of strength among active strategies, and fees are competitive across many funds. While the product development process has been streamlined, and although the firm has launched new strategies at a slower pace, lineup turnover remains a concern as a culture of asset-gathering prevails. New offerings are partly related to an expansion of ESG capabilities, but the firm is also building out its thematic equity, multi-asset, alternatives, and exchange-traded fund range. 
At this stage, we continue to believe that DWS' strengths justify a Parent Pillar rating of Average despite several weaknesses in its stewardship practices, but we will closely monitor the company for further disruption.

Average

Parent

Xtrackers MSCI USA ESG Leaders Equity ETF

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