Exchange traded fund strategies that track environmental, social, and governance, or ESG, principles could be a good way for investors to diversify their core investment portfolios.
Todd Rosenbluth, head of ETF and mutual fund research at CFRA, pointed out that investors in ESG-focused ETFs should be pleased with how they performed in 2021, Barron’s reports.
“ESG ETFs performed better than you might have expected last year, given that they are broadly diversified, so they’re not likely to significantly underperform or outperform,” Rosenbluth told Barron’s.
Rosenbluth also added that CFRA has varying classifications when it comes to ETFs that simply have a focus on the environment, like clean energy or low carbon footprint strategies, compared to other ETFs that take into account metrics based on factors like corporate governance and social change.
Rosenbluth argued that those focusing on ESG principles can serve as core holdings in a diversified investment portfolio since they include all sectors and are priced at “only a slight premium” to traditional passive index-based ETFs. On the other hand, those that target specific themes like clean energy may be better suited to augment a portfolio or act as a satellite position.
Collectively, the 10 largest of these ESG-related ETFs brought in $15 billion of net inflows over 2021, accounting for $52 billion in total assets under management by year end.
“It was a very strong year in asset gathering,” Rosenbluth added.
Rosenbluth also attributed the outperformance in the ESG segment to its hefty tilt toward mega-cap technology names like Google, Amazon, and Apple.
“You could outperform in ESG if you were overweight the sector of stocks that did well, and you perhaps avoided stocks that have lagged behind in the broader market,” Rosenbluth said, adding that Microsoft had a very good year in 2021, while Facebook, now called Meta Platforms, was weaker.
Lastly, it is important for investors to look under the hood to fully understand what they are buying into.
“It’s really important to look at what you’re getting with an ETF, and not just the fee or not just the asset manager,” Rosenbluth said. “Investors need to decide: Are they comfortable with stock-specific risks—i.e., a double-digit weighting in Microsoft and no Amazon and no Apple—or do they want something more broadly aligned with the market?”
For more news, information, and strategy, visit the ESG Channel.