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Here's Why ESG ETFs Exceled in Last Three Years

Sanghamitra Saha
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The concept of environmental, social and governance (ESG) may sound conservative but the psyche of ESG investors do not appear to be so at first glance. At least, an article published on Wall Street Journal hints at that.

The article went on to explain that unlike traditional investors, who rush for safety when any negative news related to the broader market hit them, sustainable investors challenge news that does not suit their purpose.

A Set of Examples

To put it simply, Wall Street Journal raised some examples. We all know that equities that are associated with social factors like low carbon emissions and righteous business practices come under the socially responsible theme. There are ETFs like iShares MSCI ACWI Low Carbon Target CRBN and SPDR S&P 500 Fossil Fuel Reserves Free ETF SPYX at investors’ disposal.

But surprisingly “in the month following the Paris Climate Agreement (which was signed in December 2015), $50.1 million flowed out of environmental-focused funds (amounting to a 1.05% drop in assets under management from the previous month).”

Likewise, President Donald Trump promoted coal in his campaign. Ideally, Trump’s election should have put down ESG investors with a low carbon view. But “during December 2016, one month after the election of Donald Trump, a staggering $2.1 billion flowed into U.S. equity sustainable funds, representing a 3.5% increase in the category’s total assets under management as of Nov 1.”

Since the U.S. election, as much as $8.1 billion has flowed into these funds, marking a 13.1% surge in the assets under management from the start of the 2016 presidential election. The Wall Street Journal article noted that this inflow has been the largest percentage inflow into any class or style of fund.

Are Sustainable ETFs Newly Defining Stability?

The article pointed out that the rise of socially responsible funds has been most prominent in the last three years from when the Obama government started easing off. In fact, unlike many style-based funds, which have been shut down, the number of sustainable funds rose 50% to a total U.S. equity ESG funds of 460, according to that article (read: Guide to Socially Responsible ETFs).

Sarah Lee Kjellberg, director and head of U.S. iShares sustainable ETFs said no new ESG ETFs were brought about in 2010, 2011, and 2013. “But in 2016, 22 ESG ETFs were launched, and new net inflows into the space more than tripled. Another 18 launches followed in 2017, coinciding with a 39% year-over-year rise in net inflows to reach more than $1.6 billion.”

When one presidency is dropping the curtain and another is emerging, changes and differences related to policies are bound to come. Against this backdrop, maybe investors are finding ESG funds more stable than many other investing options. Maybe they are not finding value ETFs that undervalued and are therefore parking money in sustainable funds (read: 5 Europe ETFs With Great ESG Scores).

After all, 70% of all investors are interested in socially responsible investing, while more than 80% of millennials seek to go socially responsible on their investment decisions, as per the data provided by Morningstar.

Apart from the social standpoint, this investing practice has a valid reason for increased gains. As per the source, lesser focus on environmental issues by the companies may result in lawsuits, fines and damages.

ESG ETFs Beating SPY’s Returns

Below we highlight a few socially responsible ETFs that beat the SPDR S&P 500 ETF SPY (down 1%) in the year-to-date frame (as of Apr 10, 2018).

NuShares ESG Large-Cap Growth ETF NULG – Up 5.2%

iShares MSCI EM ESG Optimized ETF ESGE – Up 2.7%

NuShares ESG Mid-Cap Growth ETF NUMG – Up 2.3%

Etho Climate Leadership US ETF ETHO – Up 1.0%

Asset Inflows into ESG ETFs too Beat That of SPY

While SPY has shed about $23.58 billion in assets so far this year, ESG ETFs like ESGE, NUMG and ETHO hauled in about $122.6 million, $1.52 million and $8.60 million, respectively. NULG lost a little $0.01 million in this phase.

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SPDR-SP 500 TR (SPY): ETF Research Reports
SPDR-SP5 FF RSV (SPYX): ETF Research Reports
ISHRS-MS EM ESG (ESGE): ETF Research Reports
ISHARS-M L CRBN (CRBN): ETF Research Reports
ETHO-CLMT LEADR (ETHO): ETF Research Reports
NUS-ESG LC GRW (NULG): ETF Research Reports
NUS-ESG MC GRW (NUMG): ETF Research Reports
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