Fossil-fuel energy stocks roared back in 2021. That could have spelled doom for the performance of sustainable investment exchange-traded funds — but about half of the largest ESG offerings did better than versus the S&P 500.
But like with many funds, stock selection, rather than sector bias, is the main reason, said Todd Rosenbluth, director of ETF research at CFRA.
Many of ESG ETFs held some of the biggest technology names that also helped to power the broad indexes, such as Apple
AAPL,
Amazon
AMZN,
Tesla
TSLA,
Nvidia
NVDA
and Microsoft
MSFT.
Weightings also mattered; some were overweight a few key names versus the broader index
SPX.
The technology sector climbed about 35% in 2021, and it’s the largest sector in the S&P 500 at 29%. Energy, meanwhile, is among the smallest S&P 500 sectors at 2.7%, which muted the influence of its 53% surge. The S&P 500 had a total return of 28.7% last year.
Rosenbluth said there was a perception that the broad-based ESG ETFs would be missing out amid the energy sector’s rally. He knew that was wrong “because energy is such a small piece of the broader market, it wasn’t going to be that detrimental to their performance.”
Several of the largest ESG ETFs are sector-neutral funds, which are designed to have similar exposure to whatever broader market exposure they track and could be substitutes for traditional core holdings. Energy companies can sometimes be included in ESG ETFs if they have high social or corporate governance scores.
Owning energy names didn’t always lead to outperformance. The best example of that is iShares ESG Aware MSCI USA ETF
ESGU,
the largest ESG ETF by assets under management at $25.7 billion, has a 2.9% weighting to the energy sector, slightly more than the S&P500. It gained 26.7%, lagging behind the S&P’s gains.
“They might not own some of the better-performing energy companies that might have scored worse from an ESG perspective,” he said.
Lukas Smart, head of U.S. iShares sustainable and factor strategies at BlackRock
BLK,
said the asset manager believes sustainable portfolios “can provide better long-term risk-adjusted returns to investors as society navigates the transition to a low carbon economy.”
He added that BlackRock’s suite of ESG ETFs gives “all investors more choice in how they want to meet their investment objectives and sustainability goals.”
While that iShares ETF slightly lagged the broader market, others among BlackRock’s ESG funds outpaced the S&P. They include the $4.39 billion iShares MSCI USA ESG Select ETF
SUSA,
which has a 1.35% energy weighting; the $4 billion iShares ESG MSCI USA Leaders ETF
SUSL,
with a 1.16% energy weighting; and the $4 billion iShares MSCI KLD 400 Social ETF
DSI,
with a 0.94% energy weighting. All three returned at least 30%.
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