It’s often said that environmental, social, and governance (ESG) exchange traded funds are chock full of growth stocks. On a related note, being overweight on growth equities is widely cited as one of the primary reasons why ESG ETFs are struggling this year.
However, some ESG ETFs may contain more value exposure than investors assume. In fact, amid selling pressure in sectors such as communication services, consumer discretionary, and technology, some growth stocks are offering value. That includes some members of the Invesco ESG Nasdaq 100 ETF (QQMG).
To be sure, QQMG is a growth-centric fund. Those are the breaks when tracking the Nasdaq-100 ESG Index, which is the ESG derivative of the famed Nasdaq-100 Index, which is itself a growth-heavy benchmark.
“In fact, most ESG equity funds skew stylistically toward growth. In the large-cap sector, Morningstar categorizes 30 ESG funds as large growth and only 17 as large value. And 58 of the 83 ESG funds in the large-blend category have style tilts toward growth,” noted Morningstar analyst Jon Hale.
Following last week’s rebalancing of various Russell indexes, some Nasdaq-100 stocks, including some residing in QQMG, entered the widely followed Russell 1000 Value Index. Currently, QQMG’s exposure to value stocks is slightly less than 9%, according to issuer data.
However, a case can be made that this percentage is actually higher. Nearly half of the Nasdaq-100’s components also reside in the Russell 1000 Index, and the overlap by weight between the two indexes is 12%, according to ETF Research Center data.
Some of those overlapping holdings that are also QQMG member firms include Google parent Alphabet (NASDAQ:GOOG), Cisco Systems (NASDAQ:CSCO), Intel (NASDAQ:INTC), and PepsiCo (NASDAQ:PEP), among others. That quartet combines for approximately 13% of QQMG’s portfolio.
“Many, but not all, ESG funds also use product-related exclusions and/or avoid companies that exhibit controversial behavior. Excluding fossil fuels results in underweightings in the traditional energy and utilities sectors. Excluding tobacco reduces consumer staples exposure. Excluding companies involved in environmental controversies or major labor disputes can reduce exposure to the basic materials or industrials sectors,” added Morningstar’s Hale.
Indeed, QQMG features no exposure to energy, financial services, and utilities stocks, and its industrial allocation is light. That’s confirmation that QQMG isn’t a true value ETF and that it is somewhat difficult to establish value purity in unison with ESG. However, QQMG has more value credibility than meets the eye, indicating that it’s an avenue for not only for ESG investors, but for those positioning for a tech rebound as well.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
