Investors focusing on domestic stocks and the related environmental, social, and governance (ESG) exchange traded funds may be apt to believe substantial allocations to growth equities are the only way to tap into ESG benefits.
However, there are avenues for pairing value equities with ESG benefits. Some domestically focused ETFs do that, but investors seeking this combination have some attractive options with international equities, including the SPDR Bloomberg SASB Developed Markets Ex US ESG Select ETF (RDMX ).
RDMX, which tracks the Bloomberg SASB® Developed Markets ex US Large & Mid Cap ESG Ex-Controversies Select Index, helps investors reduce home country ESG bias while adding international diversification benefits to their portfolios, but the ETF’s benefits don’t end there.
“Compared to US stocks, international developed market stocks have had a relative value advantage for some time now. For example, the Bloomberg SASB Developed Markets ex US Large & Mid Cap ESG Ex-Controversies Select Index has a 12-month forward price-to-earnings (P/E) multiple of 11.8 versus the S&P 500 Index figure of 18.2,” said State Street Chief Investment Strategist Michael Arrone.
Indeed, international developed market equities have long been less expensive than U.S. equivalents, but RDMX is an indication that investors can embrace ESG without having to take on excessive allocations to growth stocks — something that can be hard to accomplish with many domestic ESG ETFs. Additionally, RDMX may offer some overlooked benefits.
“What may be less widely known by investors is that international developed market stocks have delivered higher revenue growth than US stocks during the second quarter earnings season,” added Arrone.
Still, many U.S. investors are loath to consider foreign equities, ESG or otherwise, simply because the group has long trailed the S&P 500 in total return terms. That’s a valid reason, but the situation won’t last forever. In fact, the interest rate hiking in the U.S. could be setting the stage for RDMX to become an attractive option for investors.
“However, a new catalyst may be emerging to propel international developed market stocks higher. The US dollar has climbed more than 11% year-to-date, creating a headwind for international developed market stocks,” concluded Arrone. “Consistent with previous Federal Reserve (Fed) monetary policy tightening cycles, the dollar advanced in anticipation of higher interest rates and during the early stages of the tightening cycle. But as the cycle matures, the dollar often begins to weaken. That could be the catalyst international developed market stocks need to improve their performance.”
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