Environmental, social and governance-oriented ETFs get a lot of flak for being more virtue signaling – and fees – than substance.

But data from last year shows that, for the most part, ETFs based on indexes weighted toward ESG metrics can go toe-to-toe with cheap "conventional" competition and win.

Seven of the ten largest U.S. equity index-based ESG ETFs outperformed the $300 billion, broad-benchmark-based iShares Core S&P 500 ETF, known by its ticker IVV. And that was after accounting for fees, according to a Monday research note by CFRA director of ETF research Todd Rosenbluth.

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Among the benchmark-beaters were two strategies that re-weight the S&P 500 by sustainable metrics: the $452 million State Street SPDR S&P 500 ESG ETF (EFIV); and the $865 million DWS Xtrackers S&P 500 ESG ETF (SNPE).

The iShares Core ETF—which charges a 3 basis-point fee— returned 28.8% for the year. Meanwhile the State Street product rose by 31.3% and the DWS-run strategy rose by 31.4%. Both charge 10 basis points.

How did they do it? Rosenbluth does not dive into the differences, but a review of the ETFs' disclosures reveals some details.

State Street and DWS use the same underlying index. S&P greens up its flagship benchmark for them by excluding companies in objectional industries like tobacco and weapons. The ETF then takes that list and tilts toward companies that score the best, relative to peers, on a corporate sustainability assessment conducted SAM, the company's ESG ratings affiliate.

The result is an index that, compared to the traditional S&P 500, has about two percentage points higher exposure to Apple and one percentage point more of the portfolio in Microsoft. But it's devoid of Facebook parent Meta Holdings – which made up just under 2% of the iShares S&P 500 ETF as of Jan. 10.

CFRA does shed some light on what makes some of the other ESG products tracked shine. The $4.1 billion iShares MSCI KLD 400 Social ETF (DSI), $4 billion iShares ESG MSCI USA Leaders ETF (SUSL) and $575 million iShares ESG Advanced MSCI USA ETF (USXF), for example, were between four and six percentage points underweight Microsoft and they do not own Apple, Amazon or Meta.

The outperformance that ESG tweaks to a widely used benchmark delivers appears to back the claim that investing in greener stocks is investing in strong performing stocks.

But not all ESG index funds fared well.

In fact, two of the largest U.S. stock ESG ETFs – the $25.6 billion iShares ESG Aware MSCI USA ETF (ESGU) and the $6.4 billion Vanguard ESG U.S. Equity ETF (ESGV) – trailed the benchmark by more than two percentage points in 2021, CFRA's analysis found. It should be noted that Vanguard's fund is an all-cap strategy, and therefore is more concentrated in mid- and small-cap names than the S&P 500.

Meanwhile, the iShares ESG Aware strategy is the most similar to the S&P 500 ETF from a top-10 holdings perspective, according to CFRA.

Strong returns help bolster the financial argument for sustainable investing, but for some clients ESG is about creating impacts beyond their portfolio. Some argue that the two have little to do with one another, but Morningstar's Jon Hale disagrees.

"[I]f you are an investor who wants your investments to have some broader positive impact on the world, the way to do it is by helping convince companies to address the material ESG issues they face," Hale said in an article on Morningstar's website last week.