DWS has expanded its range of responsible investment ETFs with the launch of the Xtrackers ESG MSCI Emerging Markets UCITS ETF.
Manooj Mistry, DWS Head of Index Investing.
The fund has been designed to provide exposure to emerging market companies that are considered to be ethical and sustainable.
It aims to achieve this by investing in stocks with high environmental, social, and governance (ESG) ratings and small current and expected future carbon footprints.
The fund has been listed on London Stock Exchange in US dollars (XZEM LN) and on Xetra in euros (XZEM GY) and complements four existing ESG-focused ETFs launched by DWS in May 2018 that target the global, US, European, and Japanese equity markets.
Manooj Mistry, DWS Head of Index Investing, said, “The expansion of our ESG Xtrackers range to cover emerging market equities will provide investors with an efficient new tool for taking exposure to this important area of the market.”
Methodology
The fund is linked to the MSCI Emerging Markets ESG Leaders Low Carbon ex Tobacco Involvement 5% Index which it tracks through direct physical replication.
The index selects its constituents from the universe of stocks that comprises the MSCI Emerging Markets Index, a widely followed benchmark for large and mid-cap equity performance across 26 emerging markets.
The initial step in the index construction process is to screen out companies that generate more than 5% of their earnings from tobacco products or operate in the alcohol, gambling, weapons and nuclear energy industries, which are perceived to exhibit significant potential for a negative ESG impact.
The construction process then employs MSCI’s ‘Global Low Carbon Leaders’ and ‘ESG Leaders’ methodologies to determine which of those securities that remain in the universe are eligible for inclusion.
The Global Low Carbon Leaders methodology measures a security’s greenhouse gas emissions and potential carbon emissions from fossil fuel reserves. The 20% of securities with the worst greenhouse gas emissions are excluded subject to sector constraints, while securities with the highest potential carbon emissions are also excluded such that half the total potential carbon emissions of the parent index (MSCI EM) is eliminated.
The ESG Leaders methodology evaluates each security based on the most pertinent ESG themes specific to its sub-industry and assigns an ESG rating between AAA (highest) and CCC (lowest). Companies that are currently not constituents of the index are required to have an MSCI ESG rating above B to be considered eligible for addition.
Securities that pass through this three-step screening process constitute the index, with constituents weighted by float-adjusted market capitalization. The index is reconstituted and rebalanced quarterly.
Relative to the parent MSCI EM index, the most notable differences are overweight positions in China (34.2% vs. 31.9%), India (13.3% vs. 8.9%) and South Africa (8.3% vs. 4.7%), and an underweight position in South Korea (6.4% vs. 12.2%). In terms of sector exposure, the ESG index is tilted more towards financials (30.5% vs. 24.7%) and consumer discretionary (19.6% vs. 13.0%), and away from information technology (7.7% vs. 15.1%).
The ETF comes with an expense ratio of 0.25%.
The four other funds within DWS’s responsible investment suite also track indices that are a part of the MSCI ESG Leaders Low Carbon ex Tobacco Involvement 5% Index series. Collectively, the funds have accumulated approximately $260 million in assets under management.
Xtrackers ESG MSCI World UCITS ETF (XZW0 LN); 0.20%
Xtrackers ESG MSCI USA UCITS ETF (XZMU LN); 0.15%
Xtrackers ESG MSCI Europe UCITS ETF (XZEU LN); 0.20%
Xtrackers ESG MSCI Japan UCITS ETF (XZMJ LN); 0.20%