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US Sustainable ETFs Face Record Outflows in 2023: Here's Why
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In 2023, US sustainability funds experienced their worst year on record, with Morningstar reporting significant net outflows, as quoted on a Yahoo Finance article. The fourth quarter alone, investors withdrew $5 billion from sustainable open-end and ETFs.
This marked the fifth straight quarter of net outflows from sustainable funds. Throughout the year, a total of $13 billion was pulled from US sustainable funds, overshadowing positive flows in Europe and dragging down the global market.
This downturn, according to Alyssa Stankiewicz, Morningstar's associate director of sustainability research, was largely caused by macroeconomic factors such as global supply constraints, geopolitical tensions, and high interest rates. Plus, political scrutiny and regulatory ambiguity surrounding "greenwashing" contributed to a lack of investor confidence, the report indicated.
Challenges and Changes in Sustainable Investing Landscape
Despite the recent setbacks, US sustainable funds had seen significant growth in preceding years. However, the total amount invested in these funds declined by 12% from its peak in 2021, reaching $323 billion by the end of 2023. Stankiewicz noted that the surge in inflows witnessed between 2019 and 2021 did not translate into a wholesale retreat by investors, suggesting a more nuanced landscape.
Impact of Specific Funds and Preferences
One notable instance contributing to the outflows was the iShares ESG Aware MSCI USA ETF (ESGU - Free Report) , which saw a withdrawal of $9.29 billion in 2023 following a shift in BlackRock's target-allocation ETF portfolios.
Goldman Sachs, an ETF provider with $30.6 billion across 41 ETFs, closed a $7.64 million climate-focused equity ETF two years post-launch, amidst increased regulatory oversight and conservative political opposition to ESG funds. Another popular ETF iShares ESG MSCI USA Leaders ETF (SUSL - Free Report) saw 2.27 billion of outflow.
Passive funds remained more popular among sustainable investors compared to active ones, with actively managed funds causing the majority of outflows.
Performance Challenges and the ESG Argument
One of the primary reasons for investor disengagement was the underperformance of sustainable funds compared to their traditional counterparts. While returns improved from the lows of 2022, sustainable equity funds still lagged behind, with the median sustainable large-blend equity fund gaining 20.8% in 2023 compared to a 23.9% gain for all funds.
This underperformance challenged the core argument of ESG investing, which posits that investing in socially responsible companies yields better long-term returns.
Long-Term Prospects and Mainstream Adoption
Despite short-term setbacks, the long-term outlook for sustainable investing remains promising. The global transition to green energy is palpable by commitments from over 110 nations to triple renewable capacity by 2030.
This presents a significant opportunity for environmentally focused investments. Moreover, the mainstream adoption of ESG principles is evident, with asset managers increasingly integrating these factors into their investment strategies, even without explicitly labeled "sustainability" funds.
Against this backdrop, investors can keep a close tab on ETFs like Zacks Rank #2 (Buy) iShares ESG Advanced MSCI USA ETF (USXF - Free Report) , Zacks Rank #2 ESGU, Zacks Rank #3 (Hold) FlexShares STOXX US ESG Select Index Fund (ESG - Free Report) , Zacks Rank #2 SUSL, Zacks Rank #3 Xtrackers S&P 500 ESG ETF (SNPE - Free Report) and Zacks Rank #3 iShares ESG Aware MSCI EM ETF (ESGE - Free Report) .
(Disclaimer: This article has been written with the assistance of Generative AI. However, the author has reviewed, revised, supplemented, and rewritten parts of this content to ensure its originality and the precision of the incorporated information.)
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US Sustainable ETFs Face Record Outflows in 2023: Here's Why
In 2023, US sustainability funds experienced their worst year on record, with Morningstar reporting significant net outflows, as quoted on a Yahoo Finance article. The fourth quarter alone, investors withdrew $5 billion from sustainable open-end and ETFs.
This marked the fifth straight quarter of net outflows from sustainable funds. Throughout the year, a total of $13 billion was pulled from US sustainable funds, overshadowing positive flows in Europe and dragging down the global market.
This downturn, according to Alyssa Stankiewicz, Morningstar's associate director of sustainability research, was largely caused by macroeconomic factors such as global supply constraints, geopolitical tensions, and high interest rates. Plus, political scrutiny and regulatory ambiguity surrounding "greenwashing" contributed to a lack of investor confidence, the report indicated.
Challenges and Changes in Sustainable Investing Landscape
Despite the recent setbacks, US sustainable funds had seen significant growth in preceding years. However, the total amount invested in these funds declined by 12% from its peak in 2021, reaching $323 billion by the end of 2023. Stankiewicz noted that the surge in inflows witnessed between 2019 and 2021 did not translate into a wholesale retreat by investors, suggesting a more nuanced landscape.
Impact of Specific Funds and Preferences
One notable instance contributing to the outflows was the iShares ESG Aware MSCI USA ETF (ESGU - Free Report) , which saw a withdrawal of $9.29 billion in 2023 following a shift in BlackRock's target-allocation ETF portfolios.
Goldman Sachs, an ETF provider with $30.6 billion across 41 ETFs, closed a $7.64 million climate-focused equity ETF two years post-launch, amidst increased regulatory oversight and conservative political opposition to ESG funds. Another popular ETF iShares ESG MSCI USA Leaders ETF (SUSL - Free Report) saw 2.27 billion of outflow.
Passive funds remained more popular among sustainable investors compared to active ones, with actively managed funds causing the majority of outflows.
Performance Challenges and the ESG Argument
One of the primary reasons for investor disengagement was the underperformance of sustainable funds compared to their traditional counterparts. While returns improved from the lows of 2022, sustainable equity funds still lagged behind, with the median sustainable large-blend equity fund gaining 20.8% in 2023 compared to a 23.9% gain for all funds.
This underperformance challenged the core argument of ESG investing, which posits that investing in socially responsible companies yields better long-term returns.
Long-Term Prospects and Mainstream Adoption
Despite short-term setbacks, the long-term outlook for sustainable investing remains promising. The global transition to green energy is palpable by commitments from over 110 nations to triple renewable capacity by 2030.
This presents a significant opportunity for environmentally focused investments. Moreover, the mainstream adoption of ESG principles is evident, with asset managers increasingly integrating these factors into their investment strategies, even without explicitly labeled "sustainability" funds.
Against this backdrop, investors can keep a close tab on ETFs like Zacks Rank #2 (Buy) iShares ESG Advanced MSCI USA ETF (USXF - Free Report) , Zacks Rank #2 ESGU, Zacks Rank #3 (Hold) FlexShares STOXX US ESG Select Index Fund (ESG - Free Report) , Zacks Rank #2 SUSL, Zacks Rank #3 Xtrackers S&P 500 ESG ETF (SNPE - Free Report) and Zacks Rank #3 iShares ESG Aware MSCI EM ETF (ESGE - Free Report) .
(Disclaimer: This article has been written with the assistance of Generative AI. However, the author has reviewed, revised, supplemented, and rewritten parts of this content to ensure its originality and the precision of the incorporated information.)