Environmental, social and governance (“ESG”) investing has remained a hot favorite among investors since the pre-coronavirus outbreak.
About than 62% respondents to the survey indicated that the social domain of the Environmental, Social and Governance (ESG) corner is attracting more attention since the start of the COVID-19 pandemic (read: ESG ETFs Appear Unscathed by the Coronavirus Carnage).
ESG investments now make up about one-third of the total U.S. AUM.The S&P 500 ETF (
SPY Quick Quote SPY - Free Report) , the Russell 2000-based ETF IWM and the Nasdaq-100-based ETF ( QQQ Quick Quote QQQ - Free Report) have gained about 10.9%, 7% and 36.5%, respectively, this year. However, several ESG ETFs outperformed the S&P 500 and some have even returned close to Nasdaq — the hottest trade of this year. Nuveen ESG Mid-Cap Growth ETF( NUMG Quick Quote NUMG - Free Report) (up 33.9% this year) is a classic example. SPDR S&P Kensho Clean Power ETF ( CNRG Quick Quote CNRG - Free Report) is up 86% while Vanguard ESG U.S. Stock ETF ( ESGV Quick Quote ESGV - Free Report) has added 17%. Let’s have a look at how this became possible. Inside the Outperformance Amid COVID-19
Technology and healthcare appear to be two of the best-positioned sectors amid the coronavirus outbreak. While this medical emergency bolstered the need for treatments and vaccines, prolonged lockdowns globally made technology a crucial thing for operations in most cases.Since most ESG ETFs are tech-heavy, the rally behind the socially responsible funds are self-explanatory.
Also, amid COVID-19, there has been a surge in interest in investing in companies that have smartly deployed their capital to confront climate change, “raise standards of corporate governance and improve human rights,” per a source called moneyobserver.com.
Will ESG Investing Lose Luster in the Post-Pandemic World?
Though virus cases are rising globally, vaccine hopes also strengthened this month. Both Pfizer (PFE) and Moderna (MRNA) indicated that their vaccines proved about 95% effective in preventing COVID-19 in clinical trials. AstraZeneca’s vaccine showed encouraging immune response in older adults.
So, the hot trades of the peak pandemic, i.e. technology, may waver in the coming days as beaten-down zones will likely take center stage now. Investors should note that small-cap stocks and economically sensitive sectors that offer value currently have outperformed this month.
“Most ESG ETFs
are concentrated in mega-cap companies and provide limited exposure to the small-cap companies," says Todd Rosenbluth, head of mutual fund and ETF research at CFRA, as quoted on investors.com.
However, while this may make some investors believe ESG ETFs may underperform in the post-pandemic world due to its over-exposure to tech, in reality, that shouldn’t be the case.
Why ESG ETFs Do Not Have to Worry Over Long Term
The largest ESG investing ETF has about 25% weighting to S&P 500 technology stocks. That's close to the S&P 500 Index
, as indicated by pundits and quoted on investors.com. So, one can expect ESG portfolio’s return in line with the S&P 500 Index at least.
However, some ETFs like CNRG (where Electrical Components & Equipment take about 24% of the fund while semiconductor-related products occupy another 24%) or
Invesco Solar ETF ( TAN Quick Quote TAN - Free Report) (more than 60% is tech-driven) do have considerable focus on technology. But that should not act as a long-term hurdle.
In any case, the long-term outlook for the tech-driven growth stocks is rosy as the pandemic pointed to the pressing need for technology in every aspect of our lives. Joe Biden’s apparent victory over President Donald Trump in the U.S. election also calls for sunnier days ahead for ESG investing.
In a nutshell, value ETFs may register a short-term bounce, but growth (specially technology) stocks will prevail in the medium term, given the ultra-low interest rate environment globally (read:
Value Or Growth: Which ETFs To Play Ahead?).
Till then, investors can focus on small-cap ESG ETFs like
Nuveen ESG Small-Cap ETF ( NUSC Quick Quote NUSC - Free Report) and iShares ESG Aware MSCI USA Small-Cap ETF (to get the best of the both worlds at the current level – small caps plus ESG. Both funds are not extremely heavy on technology. ESML Quick Quote ESML - Free Report) Want key ETF info delivered straight to your inbox?
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