Broad-based domestic equity environmental, social, and governance (ESG) exchange traded funds are often heavy on growth stocks.
With nearly half of its roster allocated to technology and consumer discretionary stocks, the IQ Candriam ESG US Equity ETF (IQSU ) isn’t an exception to that rule, and while such heavy growth exposure was problematic for IQSU and friends in the first half of 2022, some benefits are emerging.
Namely, some of the growth stocks, including some IQSU member firms, that were battered in the first six months of 2022 are now trading at attractive discounts. That’s true even with the benefit of an impressive rally by growth names off the July lows.
“Growth stocks are up 18.0% since the bear market low point on June 16 as measured by the Morningstar US Growth Index, 6 percentage points ahead of the broader U.S. market. But these stocks are still down 22.3% for the year through Aug. 10. That puts the growth index on track for its worst year since 2008. That has left swaths of growth companies trading below their fair value estimates from Morningstar’s stock analysts,” noted Morningstar analyst Lauren Solberg in a note out last week.
Some of IQSU’s marquee components are quality names that Morningstar views as undervalued, including Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN).
“Office 365 retains its virtual monopoly in office productivity software, which we do not expect to change in the foreseeable future. We believe that [Microsoft’s] customers will continue to drive the transition from on-premises to cloud solutions, and revenue growth will remain robust with margins continuing to improve for the next several years,” said Morningstar equity analyst Dan Romanoff of Microsoft.
As of August 19, Microsoft and Amazon are IQSU’s second- and third-largest holdings, respectively, combining for about 12.5% of the ETF’s weight. Another IQSU holding that fits the bill as high quality and attractively valued is infrastructure software provider Adobe (NASDAQ:ADBE).
“In our view, there is no more-comprehensive marketing platform. This approach makes sense to us in that Adobe is leveraging its already strong position within the creative professional market. We believe switching costs drive a narrow moat for Adobe’s digital experience segment. While we believe in the strong and comprehensive solutions under this umbrella, we note Adobe did not create the markets involved, does not have a first-mover advantage, and does not enjoy any quasi-monopoly status with products here,” added Romanoff.
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