Environmental, social, and governance funds, including exchange traded funds, took plenty of lumps in the court of public opinion and political circles. Those woes were compounded by the recent slump in technology stocks, which are staples in many ESG ETFs.
In better news, data indicated outflows from these products are slowing. And that could be a positive for assets such as the Invesco ESG Nasdaq 100 ETF (QQMG ) and the Invesco ESG Nasdaq Next Gen 100 ETF (QQJG ). The recent pullback in technology stocks has weighed on those ETFs and others like them. But there are signs investors are exercising some patience with ESG funds.
For example, second-quarter outflows from passive ESG funds — both QQMG and QQJG are passively managed — declined to $960 million from $4.3 billion in the first three months of the year, according to Morningstar data. No, outflows aren’t positive. But slowing pace of capital flight from environmental, social and governance funds could be an encouraging sign going forward.
Factors Driving ESG Outflows Aren’t Permanent
In what could be good news for QQMG and QQJG, some of the factors that sparked outflows from ESG funds aren’t permanent. Even the political chatter that previously weighed on ESG has waned. As for macroeconomic issues, high interest could eventually be a thing of the past if the Federal Reserve starts lowering rates in September, as expected.
“Although the motivations behind outflows cannot be precisely quantified, several key factors contribute to this trend. These include high interest rates, which have made alternative investment options more appealing and diminish the attractiveness of sustainable funds,” noted Morningstar.
Additionally, the aforementioned weakness in technology stocks could last a while longer. But that won’t be a permanent condition either. That’s pertinent when discussing QQMG and QQJG because ETFs’ weights to tech are 59.97% and 44.29%, respectively. When the technology sector rebounds — and it will — that would likely bolster the performance of the Invesco ETFs as well as other ESG funds, allaying performance concerns along the way.
Another point in favor of QQMG and QQJG is that the funds’ methodologies feature avenues for guarding against greenwashing, which has been a drag on ESG adoption. Said another way, these two ETFs walk the ESG walk.
“Concerns about greenwashing have also contributed to reduced investor confidence, as skepticism grows regarding the genuine sustainability credentials of some funds. Furthermore, the increasing politicization and regulatory scrutiny of ESG investing have prompted some investors to reevaluate their positions, resulting in further outflows,” concluded Morningstar.
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