ESG Sustainability Investing

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>>> Is Socially Responsible Investing Costing You In Hidden Ways?


Investor's Business Daily

by MATT KRANTZ

11/19/2020


https://www.investors.com/etfs-and-funds/etfs/esg-investing-socially-responsible-investing-costing-hidden-ways/?src=A00220


ESG investing may make you feel socially responsible. But is it costing you money, too?

Lately it is. Exchange traded funds with ESG investing goals don't tilt toward the stocks outperforming ever since this month's promising Covid-19 vaccine news. And that's energy and industrial stocks plus small companies' shares.

ESG investing's focus on large blend companies has been a good thing for years. But now value-oriented S&P 500 sectors and small companies are gaining. Investors are rushing into cyclical stocks, which tend to rally along with an economic recovery. Many ESG funds aren't positioned to capture this shift, if it lasts.

"The recent rotation toward value suggests that the growth-value style pendulum, at long last, could be swinging in value's favor," said Jack Ablin, chief investment officer at Cresset Capital Management.

ESG Investing Isn't A Value

The rotation to small and value stocks is noteworthy. And that doesn't play into ESG's favor.

The Vanguard Small-Cap Value ETF (VBR) is up 15.3% just this month so far through Nov. 18. That outpaces the 9.4% gain by the largest ESG ETF, the $11.8 billion-in-assets iShares ESG Aware MSCI USA ETF (ESGU).

Much of the recent lagging of ESG investing versus small value is due to ESG's large-cap focus. Roughly two-thirds of many popular ESG portfolios is in large blend and large growth stocks. And that's why the iShares ESG Aware MSCI USA ETF is in lockstep with the S&P 500 this month. The big-cap focused SPDR S&P 500 ETF (SPY) is up 9.1% this month.

Find The Most Promising Growth Stocks

"Most ESG ETFs are concentrated in megacap companies and provide limited exposure to small cap companies," says Todd Rosenbluth, head of mutual fund and ETF research at CFRA.

But, ESG investing's sector weightings aren't helping it catch the post-vaccine rally, either. The Vanguard Value ETF (VTV) is up 11.4% this month. It holds 3.9% of its portfolio in the sharply rebounding S&P 500 energy sector, the top sector of the month. That's roughly double the exposure of the iShares ESG Aware MSCI USA ETF.

Additionally, the Vanguard Value ETF puts 11.8% of its portfolio in industrials, or roughly two percentage points more than the largest ESG investing ETF.

Is ESG Investing Overexposed To Tech?

There's good news. ESG investing isn't vulnerable if tech stocks cool off as many people think. It's commonly thought ESG investing is tilted toward S&P 500 tech companies. But "data does not back up the old adage," Rosenbluth said.

The largest ESG investing ETF carries a 25% weighting to S&P 500 technology stocks. That's nearly in line with the S&P 500. Some ESG investing plays own more tech, though. The Invesco Solar ETF (TAN), with more than $2 billion in assets, puts roughly two-thirds of its portfolio in tech stocks.

With that said, value ETFs underweight tech. Vanguard Value holds just 7.8% in tech stocks.

And yet lately this month, the technology sector isn't where it's at. The Technology Select Sector SPDR ETF (XLK) is up 8.6% this month so far, well below energy and industrials. Energy stocks are up 23% this month and industrials 15%. They're the No. 1 and No. 2 S&P 500 sectors in November so far.

Do Your Values Collide With ESG Investing?

Rosenbluth still thinks ESG investing should neither help, or hurt, your portfolio materially over the long term. Plus, the rotation to small value stocks might falter, as has happened several times. Growth stocks have topped value for years.

And this year, for instance, the iShares ESG Aware MSCI USA ETF is up 14.2%. That's much stronger than the S&P 500's 10.7% gain this year. And some specialized ESG bets are doing even better, especially following the election. The Invesco Solar ETF is up a blistering 143% this year.

"We think investors that are focused on investing with a values-based approach should expect performance to generally be in line with the broader market over the long term," Rosenbluth said. "Some years they will lead and other years they will lag."

Most Large ESG ETFs Lag Value Stocks In November

They're not tilted to areas outperforming lately like energy, industrials and small caps


ETF Symbol November % Ch. Assets ($ Billions) Expense Ratio


iShares ESG Aware MSCI USA (ESGU) 9.4% $11.8 0.15%

iShares ESG Aware MSCI EM (ESGE) 9.2% $5.4 0.25%

iShares ESG Aware MSCI EAFE (ESGD) 13.8% $3.5 0.20%

Xtrackers MSCI USA ESG Leaders Equity (USSG) 10.3% $2.7 0.10%

iShares ESG MSCI USA Leaders (SUSL) 9.4% $2.7 0.10%

WisdomTree Emerging Markets ex-State-Owned Enterprises Fund (XSOE) 7.3% $2.6 0.32%

iShares Global Clean Energy (ICLN) 10.1% $2.5 0.46%

Vanguard ESG U.S. Stock (ESGV) 8.7% $2.5 0.12%

iShares MSCI KLD 400 Social (DSI) 8.7% $2.4 0.25%

Invesco Solar (TAN) 8.6% $2.2 0.71%

Non-ESG Comparisons

SPDR S&P 500 ETF Trust (SPY) 9.1% $323.7 0.10%

Vanguard Value (VTV) 11.4% $58.3 0.04%

Vanguard Small-Cap (VB) 12.9% $33.3 0.04%

Vanguard Small-Cap Value (VBR) 15.3% $16.0 0.07%


Sources: IBD, ETF.com

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