Environmental, social, and governance (ESG) exchange traded funds often tilt heavily toward growth stocks — a trait that’s exposing investors to subpar returns this year as growth stocks retreat.
However, with the proper level of due diligence, investors can identify ESG funds with surprising value traits. Arguably, the SPDR SSGA Gender Diversity Index ETF (SHE ) is one such example. As its name implies, SHE isn’t an ESG ETF in the strictest sense of the term. Rather, SHE is a marquee member of the growing cohort of funds providing exposure to gender lens investing.
Owing to the point that it’s not a run-of-the-mill ESG fund, SHE, although it’s passively managed, isn’t as growth-heavy as old guard counterparts. That’s a clear advantage at a time when value stocks are back in style.
“Value stocks have a history of outperforming their growth counterparts in times of rising rates and inflation,” according to BlackRock research. “This is because the cash flows of value companies are front-end loaded. Growth stocks, in contrast, are considered longer-duration assets with expectations of greater cash flows further into the future. These farther-off cash flows get discounted by higher rates, giving value stocks an upper hand in an inflating environment.”
Indeed, SHE isn’t a pure value ETF. The fund allocates about 49% of its weight to technology, consumer discretionary, and communication services stocks. Those are growth sectors, and struggling ones at that.
However, SHE is sector agnostic. The fund aims to provide exposure to companies with superior gender diversity relative to others in their respective sectors, meaning it’s possible that over time, the fund’s sector exposures can shift to include deeper value or growth tilts.
As things stand today, SHE allocates about 28% of its weight to healthcare and financial services stocks — two prime value destinations. That’s an overweight of 300 basis points to those groups relative to the S&P 500, confirming SHE has some credibility as a value idea and that’s meaningful as interest rates are likely to continue rising.
“In a BlackRock Fundamental Equities analysis of growth versus value stocks using data since 1927, we found value had achieved greatest outperformance in periods of moderate to high inflation. It was only when inflation was very low that value performance paled. Value stocks have also tended to perform well amid rising interest rates. Over the past 40 years, a sizable portion of value returns has come during periods of rising rates,” concluded the asset manager.
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