Last year was an interesting one regarding how market participants view environmental, social, and governance (ESG). Those that oppose that style seemingly grew more strident in that opposition while ESG supporters displayed continuing devotion. All that arguing aside, what’s not up for debate is that many ESG ETFs faltered last year due in large part to above-average allocations to growth stocks. The IQ Candriam ESG US Large Cap Equity ETF (IQSU), which allocates 35.2% of its lineup to tech stocks, is part of that group.
However, that could also be a sign IQSU also merits consideration as a 2023 rebound idea, particularly with growth stocks showing signs of life early this year. IQSU offers investors the added advantage of largely steering clear of ESG controversies, including companies that may be overhyping their ESG credentials – currently a major faux pas in the eyes of investors and regulators.
“Rather, ESG ratings often place a heavy emphasis on the impact of climate change on the corporate bottom line. A business could score well if climate change isn’t perceived as a risk to profits, or it may achieve high marks if it’s trying to mitigate the impact. An oil producer could win a high score if it’s investing in renewable energy. Tech companies also tend to rate highly because of their low carbon footprint, even if tons of computer waste ends up in landfills, or components come from copper and lithium mines with near slave-labor practices,” reported Lauren Foster for Barron’s.
The Barron’s article mentions another important point. One of the primary reasons some actively managed ESG ETFs outperformed rivals last year were more sizable allocations to value stocks. Value is on a two-year winning streak overgrowth and there are expectations that the streak will extend this year.
“Many ESG funds hold large slugs of high-growth tech stocks, partly because the industry is perceived not to have a large impact on carbon emissions. But tech was a disaster last year, tumbling 33%; funds that were underweight in the sector had a tailwind. Funds that emphasized value got another boost, as large-cap value stocks fell just 7.5%, on average, including dividends,” according to Barron’s.
For its part, IQSU is a passive ETF. It follows the IQ Candriam ESG US Equity Index and while the fund is overweight tech relative to the S&P 500, it’s not bereft of value levers. For example, the ETF allocates almost 19% of its weight to the healthcare and financial services sectors, both of which are prime values destinations.
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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.