On this week’s episode of "ETF Prime":https://etfstore.com/evolution-of-esg-investing/, host Nate Geraci speaks with ETF Trends’ managing editor Lara Crigger, who discusses the ESG success stories and innovations within the ETF space this year and how the understanding of ESG is changing and evolving.
Geraci is also joined by BlackRock’s global head of sustainable research ETF and index investments Laura Segafredo and MSCI’s executive director ESG client coverage Sarah Greenberg, who talks about incorporating ESG into a portfolio and what investors should be aware of within the space. Later, Geraci is joined by Roundhill’s co-founder and CEO Will Hershey, who discusses ETF tickers and social media’s role in the ETF industry.
The discussion opens with Crigger answering a question about her takeaway on cryptocurrency ETF attempts as someone who has watched plenty of them over the years. Crigger says that she was surprised by exactly how strong the ProShares Bitcoin Strategy ETF (BITO ) came out of the gate, unseating the SPDR Gold Shares (GLD ) as the fastest ETF to hit $1 billion in AUM. The Valkyrie Bitcoin Strategy ETF (BTF ) has also hit markets in a strong debut but remains somewhat overshadowed by BITO.
“I am on the record as saying that this particular product, I think, is going to help advisors because it can help them meet clients where they are; crypto is something that clients want, and now it’s going to come in an easy-to-use ETF package,” Crigger says.
One of the big drawbacks and potential sticking points for a bitcoin futures ETF versus spot bitcoin exposure is the limitations built into the futures markets, namely position limits. BITO has already rolled into December contracts, having hit the 4,000 contract limit for November. If the popularity of the ETF continues, it could cause issues long-term with accountability limits with the CFTC and the need to seek other exposures.
The Blackrock U.S. Carbon Transition Readiness ETF (LCTU ) is one of the top launches of this year, with BITO creeping up quickly on its numbers. It reflects an increased focus on sustainability by investors and issuers alike. However, this fund hasn’t seen much traction since launch, Crigger explains, and it falls into a category of ESG funds that tick very specific boxes for investors and don’t really grow much beyond that.
Crigger finds particular interest in the Engine No. 1 Transform 500 ETF (VOTE ), a fund that buys the companies within the S&P 500 and keeps the shares to utilize proxy voting rights. It utilizes the voting shares to vote in more sustainable ways within the company to bring about change. This strategy has worked in the past for the hedge fund activist — see the time it unseated three board seats on the Exxon board of directors and replaced them with individuals focused on sustainability and environmentally sound practices.
At only five basis points, VOTE remains competitive with other large funds that also track the S&P 500 broadly and is a great counterargument against ESG investing being too expensive.
“It shows there is some pent-up demand there by investors where they want this activist approach, they want the investment manager actively engaging on ESG issues. I think that’s noteworthy,” Geraci says.
ETFs such as the Humankind US Stock ETF (HKND ) and the Impact Shares Affordable Housing MBS ETF (OWNS ) also launching this year reflects an evolution within the ESG space, and all have experienced organic growth.
“These are grassroots ideas that are really kind of taking off with investors; they may not be billion-dollar funds yet, but they’re concepts, they’re ideas that investors like,” Crigger explains.
At a glance, all of the thematic ESG ETFs seem unrelated, but Crigger argues that they all revolve around the underlying theme of carbon transition. She believes that the three components of ESG (environmental, social, and governance) are much less individualized now and instead are interrelated and all linked these days.
The KraneShares Global Carbon ETF (KRBN ) is a carbon allowances fund that has been a powerhouse of an ESG ETF; to date, the fund has over $1 billion in AUM, predominantly through organic growth with very few days of outflows, and of those, most were redemptions, Crigger says.
With $111 billion in AUM in ESG ETFs currently, it’s a space that continues to experience incredible growth and reflects only a small part of the market. ETFs currently hold a total of $7 trillion AUM, and ESG inflows year-to-date account for 5% of all inflows into ETFs.
“If anybody was expecting ESG ETFs to become the largest segment overnight, it’s not going to happen, but it’s also not shrinking either,” Crigger says.
ESG Funds and Data
Moving on, Geraci speaks with Laura Segagredo, global head of sustainable research ETF and index investments at Blackrock, the biggest ETF issuer globally, and Sarah Greenberg, executive director of ESG client coverage at MSCI, a premier indexer. Blackrock is a client of MSCI in creating ESG investing solutions, whether through funds or ESG data; in fact, 58 of the 113 ESG products that BlackRock offers use an MSCI Index.
Segagredo explains that the growth in ESG interest is largely due to global warming and the effects that are being increasingly felt through catastrophic climate events — such events have directly caused the deaths of 400 people in the U.S. alone so far this year.
“Clearly, that’s top of mind for our clients; how do we adapt to a world that is moving in this direction, but also how do we make sure that our portfolios are prepared for the transition to a low carbon world that’s necessary to avoid the worst effects of these catastrophic climate events,” Segagredo explains.
There are several ways to go about investing within the ESG space, including exclusionary approaches that remove fossil fuel and carbon emission exposures, priority investing in a way that increases exposure to companies that are aligned more optimally for the carbon transition, and reducing exposure to less-prepared companies, and also targeting climate themes and impact outcomes.
Greenberg explains that MSCI offers over 700 different climate data points for clients, including “scope one, two, and three carbon emissions that can be used to calculate carbon footprints across multi-asset classed portfolios,” and a wide variety of other types of data for institutional investors, professional investors, and others.
The podcast closes out with a discussion with Roundhill Investments co-founder and CEO Will Hershey about the role that ticker symbols can play. Roundhill currently has BETS for a sports betting ETF, (META ) for their Roundhill Ball Metaverse ETF, NERD for their e-sports ETF, and a host of other tickers that are attention-catching.
“In today’s world that’s really driven by short attention spans and social media, tickers really have become the brand for companies, but especially for ETFs. Really, each ETF is its own brand,” Hershey explains.
Roundhill’s META has seen an uptick of inflows with the announcement by Facebook that it was changing its name to Meta (their new ticker will be MVRS, however). The popularity plays into the importance of themed tickers, Hershey says, and how having an easily identifiable ticker for the theme of the ETF makes a difference.
The fund partners with Matthew Ball and is the first of its kind to track the performance of the Metaverse, the internet’s successor, which claims that it will bridge the physical and virtual worlds.
“We’re talking about a fundamental shift in the types of content that people are going to be transmitting” that will be a drastic change from the way that the internet currently operates, says Hershey.
Hershey closes by discussing social media and its role in brand building and sharing themes and information and how it allows a much greater exposure for ETFs to a broader number of people.
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