The Invesco ESG NASDAQ 100 ETF (QQMG ) is just three months old, but amid surging adoption of environmental, social, and governance (ESG) funds, this rookie exchange traded fund could mature rapidly this year.
QQMG, which tracks the the Nasdaq-100 ESG Index — the ESG offshoot of the widely observed Nasdaq-100 Index (NDX) — could prove to be a well-timed addition to the ESG ETF landscape because more and more, funds in this category are allaying investors’ concerns about performance. That’s particularly true in the domestic large-cap equity space, which is QQMG’s universe.
“The Morningstar U.S. Sustainability Leaders Index—representing the 50 U.S. companies with the best ESG scores as measured by Sustainalytics (a division of Morningstar)—returned 33.3% for the year, beating the broader U.S. market by more than 8%,” says Morningstar analyst Lauren Solberg. “It wasn’t just companies ranked the very highest in ESG scoring that outperformed. Morningstar’s broadest basket of sustainable companies, measured by the 373-stock Morningstar U.S. Sustainability Index, returned 29.1% in 2021, 3 percentage points better than the overall U.S. stock market.”
Even with the ESG mandate, QQMG holds 94 of the members of the NDX, indicating that benchmark long had ESG credibility before that style of asset allocation swept over the investment community.
QQMG’s DNA is relevant for another reason. NDX has a lengthy history of beating the S&P 500 and the Russell 1000 Index. Funds focusing on sustainability are cobbling together similar track records, indicating that QQMG’s NDX/ESG combination could be potent over the long-term.
“With the numbers posted in 2021, sustainable investing strategies continue their run of beating conventional market benchmarks over longer periods,” adds Solberg. “Six out of the 10 U.S. sustainability indexes beat their benchmarks over the trailing three-year performance period, as did seven over the five-year period.”
Something else to consider is performance attribution. Much of NDX’s long-term success relative to competing benchmarks is the index’s significant overweighting to technology stocks. Tech and consumer discretionary stocks are the primary drivers of out-performance by many ESG funds.
“The tech and consumer cyclical sectors had a more notable impact on sustainability portfolios. Over the past five years, the Morningstar U.S. Technology Index has grown more than 30% and the Morningstar U.S. Consumer Cyclical Index is up 24%, ahead of all other U.S. sector indexes—and both the Morningstar U.S. Sustainability Leaders and Morningstar U.S. Sustainability indexes carry extra concentrations in those two areas,” notes Solberg.
QQMG allocates almost 72% of its weight to those two sectors, according to issuer data.
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