Once again, emerging markets equities are disappointing investors and it’s no secret that environmental, social and governance (ESG) strategies are struggling this year due in large part to slumping growth stocks.
On the surface, those factors might discourage investors from considering exchange traded funds that combine emerging markets stocks with ESG virtues. However, that evolving combination is likely on sale today and could offer long-term rewards for patient rewards, indicating the SPDR Bloomberg SASB Emerging Markets ESG Select ETF (REMG ) is an ETF worthy of evaluation.
“The argument that emerging-market ESG funds outperform is also compelling, according to an IMF paper on recent trends. In the past several years dedicated ESG returns were 2% superior over broad gauges for bonds, and 7% for equities,” wrote Kleiman International Consulting founder Gary Kleiman in an op-ed for Barron’s.
REMG, which tracks the Bloomberg SASB® Emerging Markets Large & Mid Cap ESG Ex-Controversies Select Index, debuted in January and holds 742 stocks. That’s far fewer than what is found in the MSCI Emerging Markets and related benchmarks, indicating that when developing economies are viewed through the ESG lens, the number of eligible securities typically declines relative to standard indexes.
Some data points confirm that among professional investors, there’s growing interest in the emerging markets ESG/combination.
“The rapid expansion of sustainable financial markets is significant regardless of any principles involved. ESG bonds saw inflows of almost $200 billion in 2021, more than triple the $65 billion from 2020. That amounts to 40% of the inflows since 2015. Emerging markets had a near 15% global share of bond issuance last year, double the proportion for equities. Equity allocation was $25 billion in 2020 and 2021 for $150 billion assets under management, with the number of funds 7% of the worldwide count,” added Kleiman.
Clearly, those data points pertain to bonds, but they could also signal a willingness among asset allocators to consider the ESG/emerging markets pairing. That would be a positive for REMG and the fund is undoubtedly pertinent in this conversation because past returns confirm stocks with strong ESG credentials often outperform emerging markets competitors that are lacking in the ESG category.
As is the case with domestic ESG strategies, investors should evaluate REMG’s sector and geographic weights. The ETF devotes about 63% of its total weight to financial services, technology, consumer cyclical, and communication services stocks.
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