With all the talk of trade war, recessions, inverted yield curves and negative interest rates in August and the start of September, many investors have every right to feel duped. Investors are looking for investing ideas, and after they factor in the U.S./China trade war, they are going to have to factor in what will be an ugly political fight into the 2020 election. One investing theme that has prevailed in 2019 is the so-called ESG investing theme, which stands for environmental, social and governance.

The bull market is now about 10 and a half years old. Most investors know they can’t just follow the ups and downs of the market every day. With the S&P 500 now back to within 1% of its highs, investors want new ideas, either now or soon. The big dilemma of “you have to invest your money somewhere” in the past decade still holds true: cash never rallies, bond yields are offensively low and the stock market keeps crawling up a wall of worry.

It turns out that ESG investing hits many of the primary buttons that investors want. These are supposed to be well-run companies with diversity and purpose. Many pay dividends, they are not into polluting and making deadly products, and they generally are believed to be companies that should still be around when our kids have kids. ESG investing is now interchanged routinely with socially responsible and sustainable investing. Call it what you want, use whatever nickname you want, even if you want to say “do-gooder investing.”

The goal with these funds is to invest in companies that seem to be doing good for society and that have models that can be sustained for decades without doing harm to society or the planet as a whole. By and large, you aren’t going to see ESG funds and exchange-traded funds (ETFs) that are loaded up with chemical, oil or coal companies; with booze, cigarette and gun makers; and with companies that make most of their profits from weapons of war. That said, there are some likely surprises among the companies that get counted in the ESG theme, when you consider potential monopolies, those that manufacture or make profits from expensive or questionable pharmaceuticals (even opioids) and so on.

There may not be a massive problem today, but there is a growing concern that all ESG investors need to be aware of. This could become a very crowded sector, and fast. The rise of ESG themes in ETFs and mutual funds used for retirement and savings plans also has created a crowded copycat situation that may only grow worse over time.

The SPDR S&P 500 ETF Trust (NYSEARCA: SPY) is the largest ETF of them all, with a whopping $275 billion in assets on last look. As, when and if ESG themes continue to gain in popularity, imagine what could happen to some of the top-ranked ESG companies. Imagine also what could happen to some of the companies that are excluded, like energy, defense and tobacco.

24/7 Wall St. has used the site ETFdb.com and the top mutual fund sites of Vanguard, Fidelity, BlackRock and SSGA (SPDR) to peruse the top 25 U.S.-based companies that dominate the ESG investing theme. By focusing on the U.S.-based companies and not the international companies and U.S. companies combined, it was actually a fairly simple task. These funds and ETFs tend to be loaded up with the same companies, and many come with more or less the same weightings. Many of these ETFs and funds track the MSCI USA ESG Leaders Index, and the overall ESG scoring is actually relative to their peers.

Please note that due to market cap changes and varying factors of how each ETF models their funds, this “top 25 list” can change or see major rotations on a monthly, weekly or even daily basis. In fact, some companies that are considered ESG leaders today may not be in the future. Other companies that screen poorly in ESG searches may make business model and operational changes in the future that suddenly make them very attractive in the ESG theme. Another issue that could have an impact on them is how market cap changes create more buying and selling over any relative period.

Here are the most common top holdings in the key ESG funds and ETFs, not including some surprises noted below.

• Microsoft Corp. (NASDAQ: MSFT)
• Apple Inc. (NASDAQ: AAPL)
• Alphabet Inc. (NASDAQ: GOOGL)
• JPMorgan Chase & Co. (NYSE: JPM)
• Visa Inc. (NYSE: V)
• Procter & Gamble Co. (NYSE: PG)
• Bank of America Corp. (NYSE: BAC)
• Home Depot Inc. (NYSE: HD)
• Verizon Communications Inc. (NYSE: VZ)
• Walt Disney Co. (NYSE: DIS)
• Mastercard Inc. (NYSE: MA)
• Intel Corp. (NASDAQ: INTC)
• Merck & Co. Inc. (NYSE: MRK)
• Adobe Inc. (NASDAQ: ADBE)
• Netflix Inc. (NASDAQ: NFLX)
• International Business Machines Corp. (NYSE: IBM)
• Salesforce.com Inc. (NYSE: CRM)

There are some surprises in the most common funds and ETFs as well, as their ESG standings might be questionable to some investors:

• Amazon.com Inc. (NASDAQ: AMZN) may own Whole Foods and may be among the Big 3 in the cloud, but its core goods-shipping business is far from being clean, and the company is notorious for issues in employee retention and labor relations.
• Facebook Inc. (NASDAQ: FB) may be the leader in social media, but how many people honestly think social media is bringing people together in harmony these days? In many cases, social media has started to feel like a prequel to The Purge movies.
• Johnson & Johnson (NYSE: JNJ) has been under pressure about talcum powder and asbestos, and it has even become part of the opioid suits.
• Coca-Cola Co. (NYSE: KO) may be adding ever more non-sugar-water beverages and moving into healthier drinks and sports drinks, but its number-one namesake product is far from being good for you, even if Warren Buffett likes to have one every day.
• PepsiCo Inc. (NYSE: PEP) also has gone deeper into drinks other than sugar-water and diet soda, but not many people think of Fritos, Cheetos and Doritos as healthy.
• McDonald’s Corp. (NYSE: MCD) scores high in ESG funds as well, but how many people think of the world’s top fast-food chain as being a health-food destination?
• Union Pacific Corp. (NYSE: UNP) as one of the top train operators in America seems surprising here, considering the pollution caused, polluting goods moved around the country and the wrecks. We won’t even get into the annoyance and time-suck that trains cause drivers that get caught by them.
• Starbucks Corp. (NASDAQ: SBUX) may pay employees better and offer better insurance and benefits, but all those calorie bomb coffee-drinks are not exactly healthy. Looking up the calories, fat, carbs and sodium content in these offerings may offer a surprise for many of its customers.

And here are the top funds and ETFs, which also may change through time:

• The iShares ESG MSCI USA Leaders ETF (NASDAQ: SUSL) had close to $1.6 billion in assets, and the top 10 stocks had a total of 28% of the entire fund’s weighting.
• The iShares MSCI USA ESG Select ETF (NYSEARCA: SUSA), formerly with the KLD ticker, was shown to have 98.9% coverage of the MSCI USA ESG Select Index. It had almost $1.2 billion in assets under management, and of the 122 holdings the top 10 had a 29% total weighting.
• The iShares MSCI KLD 400 Social ETF (NYSEARCA: DSI) tracks the MSCI KLD 400 Social Index and has almost $1.6 billion in assets under management. With 405 holdings (from 400 issuers), the top 10 holdings had a combined weighting of 28.4%.
• The Vanguard FTSE Social Index Fund Admiral Shares (VFTAX) is an open-ended mutual fund with $6.2 billion in the fund, and its top 10 holdings make up about 26% of the entire weighting. It tracks the Vanguard FTSE Social Index Fund and screens for certain social, human rights and environmental criteria.
• The Vanguard ESG U.S. Stock ETF (ESGV) is still very new and tracks the FTSE (Russell) U.S. All Cap Choice Index. It has almost 1,000 holdings, and the top 10 by weight have a combined 21.5% weight of the entire ETF.
• The Fidelity U.S. Sustainability Index Fund (FITLX) had about $178 million in assets, and of the 321 issues (326 holdings), the top 10 holdings had a 27.2% weighting. It is shown to normally invest at least 80% of assets in securities included in the MSCI USA ESG Index.
• The Xtrackers MSCI USA ESG Leaders Equity ETF (NYSEARCA: USSG) tracks the MSCI USA ESG Leaders Index and now has over $1.36 billion in assets. With over 320 holdings, the top 10 have almost a 28% weighting.
• The FlexShares STOXX US ESG Impact Index Fund (ESG) tracks the STOXX U.S. ESG Impact Index. It has only $50 million in assets, and of the 283 holdings, the top 10 have a total weighting of 33.4% of the entire ETF.

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