The exchange traded funds industry is an optimal place to gauge new trends with one of the most obvious being investors’ increasing desire for environmental, social and governance (ESG) products. Issuers are tapping into that demand by rolling out a spate of new funds targeting virtuous investing, including the SPDR S&P 500 ESG ETF (NYSEARCA:EFIV). The EFIV isn’t yet two months old.
The EFIV ETF has the potential to be one this year’s more well-timed ETF launches. Less than two months on the market and the fund already has $26.65 million in assets under management. Moreover, the new ETF debuted as advisors and investors poured into ESG funds.
In July, globally listed ESG ETFs added $6.76 billion in assets, bringing the year-to-date tally to $38.78 billion while pushing the aggregate assets under management total for the group to over $100 billion.
That 2020 figure “is significantly higher than $12.37 billion gathered at this point last year and the $26.71 billion gathered in all of 2019,” according to ETFGI, an ETF research firm. “Total assets invested in ESG ETFs and ETPs increased by 14.7% from $88 billion at the end of June 2020 to $101 billion.”
Examining the EFIV ETF
EFIV is the second ETF to follow the S&P 500 ESG Index, which is, as its name implies, the ESG spin on the widely followed S&P 500. Of course, not all S&P 500 members make the ESG cut so EFIV’s roster of 310 stocks is smaller than the more than 500 residing in the traditional S&P 500.
There are some interesting elements to EFIV’s underlying index. For example, it’s both rigid and fluid. As just one example, earlier this year, Facebook (NASDAQ:FB) was booted from the benchmark only to be added back a couple of months later.
The S&P 500 ESG Index aims to retain as many companies from the S&P 500 as possible (and thus closely replicate the risk/return), after removing certain companies—based on ESG principles—and re-weighting those that remain by market capitalization. Companies are excluded if they have a low ESG score relative to global industry peers, are involved in controversial weapons or tobacco, perform poorly on the principles of the UN Global Compact, or are involved in controversies deemed material to their ESG performance,” said S&P Dow Jones Indices.
Translating that into English, it’s common for ESG ETFs to exclude alcohol, gambling and tobacco companies as well as civilian weapons manufacturers.
Another common element of equity-based ESG ETFs is overweighting technology stocks. EFIV does this in modest fashion as its tech exposure is less than 200 basis points in excess of the SPDR S&P 500 ETF (NYSEARCA:SPY). EFIV allocates about 16% of its combined weight to Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) compared to about 12% to that pair in SPY.
Good News and a Risk
This year is proving to be a pivotal proving ground for ESG ETFs. Owing to its July debut, the EFIV ETF isn’t part of this conversation, but the takeaways are encouraging. ESG ETFs were fairly sturdy during the March market swoon and more than adequately participated in the second-quarter rebound.
After showing greater resilience than conventional funds when stocks plummeted in the first quarter, sustainable equity funds available to U.S. investors more than held their own during the second-quarter rebound,” according to Morningstar. “Most sustainable funds finished in the top halves of their Morningstar categories for the quarter, and 18 of 26 ESG-focused index funds outperformed conventional index funds that cover the same parts of the market.”
The risk is, as many ESG critics point out, that these products are overweight tech and communication services stocks – traits that drive out-performance. That’s great until those sectors or growth stocks in general fall out of favor.
That’s a known risk with ESG ETFs, but as the data presented earlier confirm, larger weights to tech aren’t keeping asset allocators away from funds like EFIV, confirming the growth of ESG funds is here to stay and is in it early innings.
EFIV charges 0.10% per year, or $10 on a $10,000 investment, making it one of the most cost-effective funds in this category.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.