Environmental, social and governance (ESG) investing is proving to be much more than a fad and ESG ETFs are the epicenter of that proof.
Last year, inflows to ESG ETFs eclipsed a record after doing so in 2020, and there’s momentum on the side of this asset class in 2022. The reasons are simple. More investors, both professional and retail, are prioritizing issues such as climate awareness, equality and sound corporate governance. As just one example, consider the increasing applications of ESG criteria being used by insurance providers in their investment portfolios.
“While U.S. insurers have long considered ESG and climate-related risks in underwriting, many U.S. insurers have only recently started to evaluate their investments using ESG criteria,” according to Conning. “The survey suggests their engagement with ESG investing factors may be accelerating – 41% of respondents indicate that they began incorporating ESG factors this past year, 79% the past two years, and only 12% more than two years ago. A total of 67% reported incorporating ESG factors into their investment considerations in 2021.”
Rising adoption of ESG strategies is also being met with intense product proliferation. Today, the number of ESG ETFs on the market is at an all-time high and that universe is growing. That can make navigating the space tricky, but by focusing on fundamentals, such as fees and underlying strategy, investors can readily locate some gems in this space. Here are a few to consider.
1. Invesco ESG S&P 500 Equal-Weight ETF (RSPE)
The Invesco ESG S&P 500 Equal-Weight ETF (RSPE) is one of the newest members of the equity-based ESG ETF fray having debuted last November. Despite that lack of age, RSPE is already relevant on the virtuous investment seen owing to at least two factors.
First, the S&P 500 Equal Weight ESG Leaders Select Index – RSPE’s underlying index – is data-driven and applies arguably more scrutiny to ESG ratings than rival benchmarks do. The proof is in the pudding as RSPE holds just 184 stocks compared to the more than 500 residing in the standard S&P 500.
Second, RSPE, as its name implies, is an equal-weight ETF, meaning concentration risk is non-existent here. That’s something to consider at a time when the top five components in the S&P 500 combine for about 20% of that index’s roster.
2. ARK Transparency ETF (CTRU)
The ARK Transparency ETF (CTRU) is also new on the ESG ETF scene. It made a debut last month and is a rare index-based addition to the ARK Investment Management suite of funds. CTRU follows the Transparency Index, which is collection of 100 companies that score well on the basis of transparency.
While that’s not a direct environmental, social or governance trait, data confirm that members of the Transparency Index are significantly less likely to be environmental offenders or commit financial fraud. Over time, that’s a meaningful trait because companies that find themselves in that type of hot water often subject shareholders to substantial punishment. Moreover, transparency can actually facilitate innovation and disruption.
“In fact, transparency has transformed several industries meaningfully over time, with the most transparent companies often the leaders and prime beneficiaries,” says ARK Invest client portfolio manager Thomas Hartmann-Boyce in a recent white paper. “The internet evolved on open-source technologies and protocols that became launching pads for innovation, so much so that Apple Inc., Amazon, Facebook, and Google, now Alphabet Inc. all scaled to market capitalizations in the range of $920 billion to $2.9 trillion.”
3. Goldman Sachs JUST U.S. Large-Cap Equity ETF (JUST)
The Goldman Sachs JUST U.S. Large-Cap Equity ETF (JUST) is another example of an ESG ETF that offers depth and data-driven approach. In the case of JUST, the fund focuses on stakeholder capitalism, which is a form of capitalism that takes into account more than just shareholder returns.
JUST tracks the JUST U.S. Large Cap Diversified Index, which scores “Russell 1000 Index companies across a variety of issues, including worker treatment, customer concerns and environmental impacts,” according to Goldman Sachs.
JUST holds 474 stocks, making it a relevant alternative to traditional broad market funds, some of which the ETF offers modest out-performance over in recent years.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
