Locating Value in ESG ETFs | ETF Trends

Environmental, social, and governance (ESG) exchange traded funds are often known for being heavy on growth stocks, and that’s one reason those ETFs are lagging this year.

With growth stocks faltering and the potential of a long spell of value outperformance setting in, some advisors and investors are pondering avenues for combining the benefits of value investing with ESG principles. Among ETFs, the IQ Candriam ESG International Equity ETF (IQSI) is a possible solution.

Indeed, much of IQSI’s credibility as an ESG/value idea revolves its status as an international fund focusing on developed market equities. As many advisors and investors well know, ex-U.S. developed market equities have long been attractively valued relative to broader domestic benchmarks. That could be a sign that IQSI has a leg up on the ESG/value proposition.

“Most managers of ESG equity funds have filled their portfolios in recent years with growth stocks, like those found in the tech sector. It’s precisely this group however that’s been hammered this year, creating losses approaching as much as 30%,” reported Tim Quinson for Bloomberg.

For its part, IQSI, which tracks the IQ Candriam ESG International Equity Index, allocates just 8.4% of its weight to tech stocks, according to issuer data. That’s the result of the bulk of the marquee developed markets technology companies being U.S.-based firms.

Traditionally, ex-U.S. developed markets have more of a value feel than indexes such as the S&P 500, explaining why foreign stocks lagged for so long. That’s another point in IQSI’s favor. Although it’s an ESG fund, it’s got value in its DNA and isn’t as growth-dependent as its domestically focused rivals.

Part of the conundrum facing funds looking to marry ESG and value are the sectors that usually fit with the latter style.

“In fact, the five sectors with the most ESG risks — energy, utilities, basic materials, consumer staples and health care — are more heavily weighted in value funds than in growth funds,” according to Bloomberg.

In IQSI, the materials and energy and utilities sectors combine for just 12.7% of the fund’s portfolio, indicating that there is minimization of ESG risk from those sectors. Overall, IQSI isn’t growth-heavy either, as the consumer discretionary, technology, and communication services sectors combine for a manageable 26.1% 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.