BLK BlackRock Inc

By Asjylyn Loder 

A brand new exchange-traded fund that tries to invest in the best corporate citizens in the U.S. is slated to begin trading at Friday's opening bell, but is already on track to be one of the most successful fund launches in history.

The fund, BlackRock Inc.'s iShares ESG MSCI USA Leaders, expects to raise more than $800 million in its Friday debut. It is especially noteworthy because the ETF fits into a small but increasingly crowded corner of the market devoted to responsible investing.

Asset managers have long heralded sustainable strategies as the next big thing in the $4 trillion ETF industry, but growth has been painfully slow. That is now changing.

ETFs that invest based on environmental, social and governance metrics have raised $1.9 billion this year, boosting assets to $12 billion. All told 30 of the 75 ETFs, including some of the most successful, are less than two years old.

While still a vanishingly small piece of the market, ESG funds are quickly gaining traction. For example, three other iShares ESG ETFs have nearly tripled in size in the past year, according to FactSet. Nuveen's ESG fund that invests in smaller companies has more than doubled in size in that time. Vanguard introduced two new ETFs in September that already have almost $670 million in assets.

Advisers have begun to realize that sustainable strategies are critical to retaining clients, especially younger investors who will inherit wealth amassed by their baby boomer parents, said Sarah Kjellberg, head of sustainable investing for the U.S. iShares business. That is one reason why big banks, digital advice platforms and large independent wealth managers have begun offering ESG portfolios in recent years.

Last year, Bank of America Corp., the largest provider of ETF model portfolios, added ESG strategies for Merrill Lynch and Merrill Edge clients, and TD Ameritrade Holding Corp. added "Socially Aware" portfolios to its Essential Portfolios robo adviser business.

"If you're not talking to your clients about it, your competitor is probably talking to them about it," Ms. Kjellberg said.

The big buyer of the iShares ETF debuting Friday is Ilmarinen, Finland's largest pension-insurance company. Ilmarinen was also the anchor investor in an identical ETF launched in March by DWS Group Inc., the asset-management business of Deutsche Bank AG. That fund now has $884 million in assets, according to FactSet.

Ilmarinen, which manages EUR47 billion ($52.8 billion), in 2017 adopted MSCI ESG indexes as the benchmark for roughly half of its listed equity investments, but couldn't find inexpensive, easily traded ETFs that met its needs, Anna Hyrske, head of responsible investment for Ilmarinen, said in a March interview.

ESG is a contemporary offshoot of socially responsible investing that tries to deliver a feel-good flavor of investing without sacrificing diversification or returns. Unlike older strategies, ESG doesn't categorically ban unloved industries but tries to find those companies that perform the best on issues like pollution and pay parity.

The new iShares ETF, like DWS Group's Xtrackers fund that launched in March, invests in an index that picks the companies with the best scores on MSCI Inc.'s sustainability ratings. To come up with the scores, MSCI analysts scour news stories, financial records, company reports and regulatory filings looking for hazards that a traditional financial analysis might miss.

Write to Asjylyn Loder at asjylyn.loder@wsj.com

(END) Dow Jones Newswires

May 10, 2019 07:14 ET (11:14 GMT)

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