This ESG ETF Can Rebound -- Here’s Why | ETF Trends

At a time when oil prices are high and as energy ranks as one of the lone bright spots in the U.S. equity market on a year-to-date basis, it’s easy for investors to get frustrated about strategies that lack exposure to that sector.

Likewise, with high-dividend and value stocks outperforming this year, that compounds investors’ woes if they’re not adequately allocated to the energy patch. Add it all up, and it’s fair to say some investors are frustrated by the 2022 performances delivered by environmental, social and governance (ESG) exchange traded funds, including the IQ Candriam ESG US Equity ETF (IQSU).

However, some market observers believe it’s not lack of energy exposure that’s confounding ETFs such as IQSU this year. Rather, it’s retrenchment by growth stocks, which have long been staples of numerous ESG ETFs.

Regarding ESG ETFs’ lack of energy exposure, it pays for investors to remember that despite a nearly two-year rally by energy stocks, the sector is still one of the smallest weights in broad market benchmarks, and “not all sustainable funds avoid fossil fuels. Morningstar data, based on a reading of fund prospectuses, indicate that only about 35% of sustainable equity funds in the United States, foreign, and global Morningstar Style Box and diversified emerging-markets categories exclude fossil fuels,” wrote Morningstar analyst Jon Hale.

For its part, IQSU allocates just 1.2% of its weight to energy stocks. That’s the ETF’s smallest sector exposure and below the percentage the S&P 500 devotes to energy names.

The bulk of the ETF’s value exposure is sourced via a combined 18.3% weight to healthcare and financial services stocks. Conversely, IQSU is indeed growth-heavy as the technology, consumer discretionary, and communication services sectors combine for 59% of the fund’s portfolio. That, not lack of energy exposure, likely explains the ETF’s struggles this year.

“A growth tilt had been helpful for quite a while leading up to this year. In fact, even figuring in this year’s returns, sustainable equity funds’ average category ranking for the trailing three years is 44, and for the trailing five years is 41. That’s pretty good. Once growth returns to favor, growth-leaning sustainable funds will benefit, so this is not a bad place to be over the long run,” added Hale.

Bottom line: Growth stocks won’t be out of favor permanently and when they regain leadership roles, ETFs such as IQSU are poised to benefit.

For more news, information, and strategy, visit the Dual Impact Channel.

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.