Broadly speaking on both counts, ESG funds posted solid returns last year. But many investors pulled capital from these products with some actively managed funds being the most afflicted by outflows.
There is a strong case for active management with ESG. However, some passive exchange traded funds in the space can serve investors, too. That list includes the Invesco ESG Nasdaq 100 ETF (QQMG ). QQMG, which tracks an index that’s the ESG counterpart to the Nasdaq-100 Index (NDX), can help investors avoid some of the performance issues that plagued some rivals last year.
“Roughly one third of sustainable equity funds dropped to the bottom quartile relative to peers. Some of the macroeconomic pressures that contributed to their modest performance—such as high interest rates, inflation, and supply chain disruptions—continue to feature in market outlooks for 2024,” according to Morningstar.
QQQS Checks Important Boxes
As Morningstar noted, many of the largest contributors to ESG funds’ 2023 upside hailed from the communication services and technology sector while some of the biggest detractors were interest rate-sensitive utilities names.
Those points are relative to market participants considering QQMG because, owing to the ETF’s NDX DNA, it’s heavily tilted to growth stocks. It’s often said that’s the case for a slew of large-cap ESG funds, but QQMG ratchets up that proposition with a combined weight of more than 74% to the technology and communication services sectors. Morningstar observes that about two-thirds of active funds with the “sustainable” label were overweight tech stocks in 2023.
Conversely, QQMG features scant exposure to sectors that have ESG credibility, but expose investors to other risks. Take the cases of utilities and real estate, both increasingly viable ESG destinations and both rate-sensitive. Those two sectors combine for less than half a percent of QQMG’s weight, indicating neither will be a detriment to the ETF’s performance.
Specific to utilities, that sector represents just 0.21% of QQMG’s – below the 2.13% it commands in the S&P 500. However, many actively managed ESG funds are significantly overweight the sector relative to the S&P 500 and returns suffered in 2023 as a result. In aggregate, the utilities sector shed 7% last year, but some of the names held by active ESG funds posted annual losses of over 10% or 20%. Those issues weren’t relevant to QQMG and that was a positive for the ETF’s investors.
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