When evaluating equity-based environmental, social, and governance (ESG) exchange traded funds, investors typically lean into domestic stock strategies, extending home country bias.
However, a growing number of ESG ETFs address international stocks, including emerging markets. The Avantis Responsible Emerging Markets Equity ETF (NYSE Arca: AVSE), which debuted in March, is part of that group.
While AVSE is a new ETF, investors may want to consider the fund’s potential benefits rather than its lack of age. The actively managed fund attempts to beat the widely observed MSCI Emerging Markets Index.
AVSE “limits the investable universe of companies by screening out those that raise concerns based on the team’s evaluation of multiple Environmental, Social and Governance (ESG) metrics and pursues the benefits associated with indexing but with the ability to add value by making investment decisions using information based on proprietary evaluations,” according to Avantis Investors.
Previously, some studies indicated that the marriage of ESG and emerging markets is a practical one on multiple levels. First, some developing economies are only now beginning to address long-running environmental issues. Second, a slew of old guard emerging markets stocks are tied to state-owned enterprises (SOEs).
Those points underscore the notion that some traditional emerging markets can expose investors to undue ESG risk. On a related note, the higher the ESG risk — regardless of region or market status — the more volatility and slack returns an investor could encounter over longer holding periods. Fortunately, there are signs that more emerging markets companies are prioritizing ESG.
“We are starting to see many of the corporates become more proactive in their targets and engagements. And regulators in emerging markets have begun to outline sustainability and ESG disclosure requirements, as seen in some parts of Europe and the Americas,” according to Morgan Stanley research. “While the increased adoption of ESG goals, sustainability reports and better disclosures will likely be a multi-year journey, positive signs are already showing from those companies we own and from those on our radar screen.”
AVSE allocates 27% of its weight to Chinese stocks. While still sizable, that’s underweight to China compared to some traditional emerging markets ETFs. The fund devotes 30% of its total weight to South Korea and Taiwan — two of the more credible ESG players among developing economies. Home to 1,615 stocks, AVSE allocates 26% of its roster to financial services names, while the technology and consumer discretionary sectors combine for almost a third of the fund’s roster.
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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.