Morningstar - Q4 2020 - 23

IShares MSCI Emerging Markets IMI ESG
Screened ETF uses just this basic controversy
screen. It takes very few active bets and
consequently closely resembles its parent index.
On the other hand, this light screen barely
affects the overall ESG profile of the ETF, which
receives an Average Morningstar Sustainability
Rating of 3 globes. The fund is perhaps
most suitable for those with a low tolerance for
active risk versus the parent index.
Xtrackers MSCI Emerging Markets ESG ETF builds
upon the core MSCI ESG exclusionary screens,
adding a combination of the MSCI ESG Leaders
and MSCI SRI Business Involvement Screens with
MSCI Low Carbon Leaders sustainability
screens. This process cuts the bottom 50% of
companies in the universe based on their ESG
scores, and the top 20% based on carbonemissions intensity. In June, the fund tightened its
business-involvement screening and introduced
a new screen covering adult entertainment,
GMO products, and thermal coal. A final hard
screen is applied, which excludes tobacco
producers, or those that earn 5% or more of their
revenue from tobacco-related products, before
holdings are weighted by their market
capitalization. These additional screens help the
fund earn an Above Average Morningstar
Sustainability Rating of 4 globes.
IShares MSCI Emerging Markets SRI and UBS
MSCI Emerging Markets SRI have the
strongest sustainability profiles. Both track
variants of the MSCI Socially Responsible
Index, which targets the top 25% of companies
in the MSCI emerging-markets universe
based on their ESG scores. A 5% cap is applied
to both strategies to avoid single-stock
concentration, an issue that has plagued
noncapped versions of the index. This cap
is instrumental in not only managing portfolio
concentration but also in controlling the
size of the China allocation.
The light screens employed by the iShares
MSCI Emerging Markets IMI ESG Screened ETF
means that its sector weights have closely
mirrored those of the parent index without the
need for additional constraints. Not so for
the other three funds.

TRE NDS

Redefining 'The Market'
Why did the U.S. stock market surge after March
even as the U.S. economy struggled? By "market,"
most of us mean the S&P 500-a market-capweighted index that is increasingly concentrated
in technology and related companies that surged
as other industries faltered.
But there are other approaches, such as the S&P
500 Equal Weight Index, the S&P 500 RevenueWeighted Index, and the WisdomTree U.S.
LargeCap Index (an earnings-weighted portfolio).
These break the link between market cap and
portfolio weight, so that more expensive
stocks don't dominate. The priciest growth names
have led this year, though. The S&P 500 gave
back some gains in September but was still
up for the year through Sept. 30. The alternative
benchmarks had not recouped their losses.

That said, the growing concentration in the
S&P 500's largest holdings, coupled with 2020's
market volatility, is reason to consider the
alternatives. The equal-weighted benchmark has
more exposure to smaller-cap names. The other
two indexes are fundamentally weighted,
based on the premise that weighting stocks by
revenue or earnings is a sound way to invest.
A comparison of returns, volatility (standard
deviation), and risk-adjusted returns (Sharpe
ratio) suggests no clear long-term advantage
for any of these approaches. The S&P 500 fared
noticeably better over the past year, but the
return and risk profiles of the four benchmarks
start to converge over a decade.
Sachin Nagarajan is a data journalist with Morningstar.

The Biggest Names Got Bigger Variations on the S&P 500 lost more in March and
gained less since.
Growth of $10K

S&P 500

S&P 500 Equal Weight

S&P 500 Revenue-Weighted

WisdomTree U.S. LargeCap
10.56
9.83
9.52
9.42

01/2020

03/2020

05/2020

07/2020

$11K
10
9
8
7

09/2020

Source: Morningstar Direct. Data as of 09/30/2020.

The Short and Long Run The S&P 500's lead narrows as time goes by.
1-Year
Index

10-Year*

Return (%)

Performance
in Market Shocks
S&P 500
Intermediate
Core Bond
S&P 500 Equal Weight
Intermediate Core-Plus Bond
S&P 500 Revenue-Weighted

15.15

WisdomTree U.S. LargeCap

Std Dev Sharpe Ratio

Return (%)

Std Dev Sharpe Ratio

23.65

0.68

13.74

13.25

1.00

2.50
27.78
Total Return
2.60
24.16
2.5%
8.15
24.09

0.19

12.03

14.86

0.80

0.19

12.26

13.96

0.86

0.67

12.78

13.68

0.99

*Annualized
Source: Morningstar Direct. Data as of 09/30/2020.

0
-2.5
-5.0

2013 Taper

2015-16

2016 Fed

Morningstar - Q4 2020

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