ESG ETFs Punching Above Their Weight | Equity ETF Channel

Net inflows to Broad ESG ETFs, which focus on environmental, social and governance metrics, more than tripled in the first 11 months of 2020 according to CFRA relative to 2019 led by $9.3 billion into the strong performing iShares ESG Aware MSCI USA ETF (ESGU).

ESG ETF supply and demand also accelerated in 2020. The number of ESG ETFs rose 35% to 116 year-to-date through November using our proprietary classifications. Meanwhile, the net inflows more than tripled to $32 billion. We further break down the ESG ETF universe to assess funds with broad approach and narrower ones focused on clean energy, corporate governance, low carbon footprint, and others.

The number of broadly diversified ESG ETFs, which hold companies that score relatively well on environmental, social and governance metrics, increased 56% to 70. Vanguard ESG U.S. Corporate Bond (VCEB) and SPDR S&P 500 ESG ETF (EFIV) are a few examples.

Yet more established Broad ESG ETFs drove the bulk of $24 billion of net inflows into the sub-category. ESGU and iShares ESG Aware MSCI EM ETF (ESGE) gathered $9.3 billion and $3.9 billion, respectively, to reach $13 billion and $5.5 billion in assets as of November.

Meanwhile, ESGU and ESGE gained 18% and 11% year-to-date through November, well ahead of the 14% and 9.2% for iShares Core S&P 500 ETF (IVV) and iShares MSCI Emerging Markets ETF (EEM). This is confirmation that investors have not given up performance to invest in a manner more suitable to their beliefs as these broad ETFs provide similar exposure to sector and countries as market-cap weighted products.

Clean Energy ETF performance trumps most other ETFs according to CFRA Research. While cloud ETFs have performed impressively in 2020, funds that invest in solar energy and other alternative energy soared even higher. iShares Global Clean Energy ETF (ICLN), Invesco Solar ETF (TAN), ALPS Clean Energy (ACES), First Trust NADAQ Clean Edge Green Energy ETF (QCLN), Invesco WilderHill Clean Energy ETF (PBW), and SPDR S&P Kensho Clean Power (CNRG) doubled in value during the first 11 months of 2020.

As a sub-category, clean energy ETFs gathered $5.5 billion of net inflows year to date through November, approximately nine times as much as in all of 2019. ICLN and TAN pulled in $1.7 billion and $1.1 billion, respectively, but nine other peer ETFs pulled in more than $50 million in new money. We think investors have increased confidence that a Biden administration will be more favorable to combatting climate change and supportive of clean energy technologies.

Chart 1 ESG ETFs Net Inflows

WisdomTree Emerging Markets ex-State Owned Enterprises ETF (XSOE), a $2.8 billion ETF, collected $1.7 billion in the first 11 months of 2020 to lead the Corporate Governance focused ESG sub-category. The ETF seeks to limit the influence of the Chinese, India, and other emerging market governments on local companies. Alibaba (BABA) and Tencent Holdings are the largest holdings.

ESG investing will continue to grow in the future. BlackRock conducted a sustainable investing survey of 425 global investors with an estimated $25 trillion in assets under management in mid-2020. Respondents plan to double their sustainable assets under management in the next five years to 37% on average. When comparing ESG factors, 88% of respondents ranked Environment as the priority most in focus, reflecting the urgency that is present by climate change, according to BlackRock. We think the growing array of targeted and broad ESG ETFs choices with growing liquidity further positions these products for continued success.

In years past, investors had to pay a significant premium for sustainable investing strategies in hopes they would pan out. However, the growing supply of low-cost ESG and thematic ETFs the last few years positions the industry for additional asset growth, beyond the popular market-cap weighted equity and fixed income funds that hold most ETF assets. CFRA rates more than 1,800 equity and fixed income ETFs based on a combination of holdings-level analysis and fund attributes, which allows us to begin coverage of many funds within the first three months.

Todd Rosenbluth is Director of ETF & Mutual Fund Research at CFRA.