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Advisors and investors are hearing plenty about the sizable inflows to environmental, social, and governance (ESG) exchange traded funds. After all, last year brought record flows to this category, and it’s reasonable to expect that this trend will continue for the foreseeable future.
That’s not a stretch because there’s a notable gap between investors who are already engaged with ESG funds and those that are not but have interest in the asset class. There are more folks in the latter category.
As more investors enter the ESG ETF arena, that could be a boon for funds such as the SPDR S&P ESG ETF (EFIV). The $420.84 million EFIV follows the S&P 500 ESG Index — the ESG offshoot of the widely followed S&P 500. EFIV’s assets under management tally is admirable considering that the ETF doesn’t turn three years old until July, but that figure could easily swell over the long term.
“Out of those who are not currently engaging in sustainable investing, 29% believe that company-level ESG policies should be a ‘fairly important’ or ‘very important’ factor when people select investments,” writes Morningstar analyst Samantha Lamas. “These individuals are in the do-should gap—they believe ESG factors are important but have yet to incorporate them in their own investing decisions.”
EFIV is a potentially appealing idea for experienced and novice ESG investors alike because the fund employs a straightforward strategy. It’s home to the S&P 500 members that meet “certain sustainability criteria (criteria related to environmental, social and governance factors) while maintaining similar overall industry group weights as the S&P 500 Index,” according to State Street.
EFIV is home to 309 stocks, approximately 200 fewer than reside in the traditional S&P 500, indicating that the ESG mandate is stringent and its application often leads to smaller rosters than those that are found with standard broad market funds.
“Our research finds that there are plenty more sustainable investors out there waiting to be brought into the fold. It’s just a matter of identifying them and removing whatever obstacle that’s keeping them from doing so,” adds Lamas.
Specific to EFIV, it could be a compelling long-term growth story in the ESG ETF arena because it has many of the hallmarks investors look for with these funds, including an overweight to tech stocks and exposure to familiar names. For example, EFIV devotes almost 17% of its weight to Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT).
For more news, information, and strategy, visit the ESG Channel.
