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Anti-woke ETFs are 'de minimis' compared to institutional ESG investing: Expert

VettaFi Financial Futurist David Nadig sits down with Yahoo Finance Live to talk about the rise in anti-ESG funds.

Video Transcript

DAVE BRIGGS: All right, Environment, Social, and Governance, or ESG funds, seeing considerable investment in the last several years. And though interest has waned slightly this year, it has spurned a countermovement into so-called anti-woke funds with holdings in fossil fuels, manufacturing, and the like. Joining us now is VettaFi's financial futurist Dave Nadig for this ETF report sponsored by Invesco QQQ. So you can invest in the anti-ESG movement now, right?

DAVE NADIG: Yeah, absolutely. We've got a couple different versions of this from funds that are sort of mechanically looking at the individual stocks that are skipped by ESG to this new fund YALL, which launched today, which is an actively managed fund that isn't pretending that it's trying to go m as much as anti-left. So it's really positioning itself against companies who take any political activism--

DAVE BRIGGS: Fossil fuels, right?

DAVE NADIG: Well--

DAVE BRIGGS: That's my first guess.

DAVE NADIG: Well, they don't actually say that. What they say is mostly they're going to avoid companies that speak out on social issues. That's the big one. We do have another ETF, DRILL, from Strive Financial, which is specifically going after those fossil fuel companies with the idea of voting for the ones that are-- and voting the shares of those individual stocks to promote more energy drilling. So I think you've got a lot of different ways to skin that cap, but the ESG side of the equation isn't going anywhere. There's still an enormous amount of money chasing that as well.

RACHELLE AKUFFO: And Dave, Rachelle here. I know obviously people have invested in things that they believe in or that they support. So that aspect of it is something that's not necessarily new. But you're saying this actually might trivialize some of these issues. Why is that?

DAVE NADIG: Well, so when we look at the broad ESG universe, this is being driven by institutions. And it's not a small amount of money. There's a PWC study just came out, suggesting that we're going to grow from $15 to $30 trillion in the US focused on ESG investing.

So the amounts of money we're talking about in some of the reactionary products here are pretty de minimis compared to the institutional money, which is going to continue to allocate based on ESG, and which, frankly, is being rewarded for that. I mean, ESG is outperforming in most reasonable time frames. Maybe not the last three months, but if you look over the course of this year or the last three years or the last five years, many of these ESG funds are actually beating their benchmarks.

RACHELLE AKUFFO: So, Dave, it sounds like you're expecting this pullback that we're seeing in ESG investing to, at some point, bounce back. What do you think that catalyst is going to be?

DAVE NADIG: Well, I think we're not really going to see much of a pullback in terms of that asset flow, in terms of the narrative around this, the political environment for it. I think that this will probably die down. I think-- I'm absolutely for people voting with their dollars. If they don't want to be with an ESG asset manager, you shouldn't be with an ESG asset manager. That's a reasonable approach to take.

But the big horse here is still that institutional market. A lot of it outside the US-- that's going to be invested in US companies based on ESG principles, regardless of what the US retail investor might do with ETFs.

DAVE BRIGGS: This is a bit of a U-turn, but do you think the impact of these Republican attorneys general will have an impact on the ESG investment space? They are taking this all the way.

DAVE NADIG: Yeah, I'm skeptical of that. If you look at, for instance, what they did in Texas, where they were trying to sort of blackball BlackRock, it made for great headlines. When you went under the hood, it was a really de minimis amount of money that was going to be pulled from BlackRock. And in fact, if you got under the hood, they had to do a whole carve-out because BlackRock was running their energy fund, their private equity energy fund.

So this is a big, complicated industry. It makes for a great headline to say we're firing BlackRock. But it doesn't actually move the needle in terms of getting more drills in the ground, or really even changing the cost of capital much.

DAVE BRIGGS: Well said.

RACHELLE AKUFFO: And Dave, what about some of the returns that we're seeing on some of these anti-woke investments in ETFs? Does it end up being worth it? As you said, you do have companies like BlackRock that are already doing business with some of these companies, perhaps, but making the headlines, nonetheless.

DAVE NADIG: Yeah, well, so one of the great things-- also frustrating things-- about ESG is it's very much in the eyes of the beholder. What I think of as ESG might not be what somebody else thinks. When we think about carbon, that's an easy one to understand. Investing or not investing or anti-investing in the net zero carbon transition, that's a pretty clean way of thinking about it.

When you start layering on things like social issues, governance issues, honestly, I think the numbers get much harder to tease out. The carbon impact stuff, that it's pretty unequivocal that the long-term returns have been positive there. 60% of institutions report that their ESG investments are outperforming consistently their non-ESG investments.

DAVE BRIGGS: Quickly, the currency hedging, we can now invest in that space. What's the move?

DAVE NADIG: Well, people have been avoiding this, and I don't really understand why. If you look at just domestic markets, like EFA versus the HEFA, the hedged version, it's been up by 10% this year, just by being currency hedged. We saw this a decade ago with Japan, DXJ, a fund that really rallied way more than the Japanese market because it hedged it out.

We're in a similar market, but investors don't want to be international at all. That's the problem. We've seen net outflows from international investing in ETFs. So while a hedged version might be a better way, there's so little appetite for international diversification, it's not picking up a bid.

RACHELLE AKUFFO: Interesting. Well, certainly an opportunity there. A big thank you to Dave Nadig, VettaFi's financial futurist. Thank you for joining us this afternoon.

DAVE NADIG: Thanks for having me.