Exchange traded funds have attracted huge inflows over the past year as investors have turned to the cheap, transparent, and easy-to-use investment vehicle. However, the sudden inundation of new money could create concentration risks in thematic and smaller segments, such as those ETFs that track climate-changing strategies.
For example, S&P Dow Jones Indices recently had to take action in its S&P Global Clean Energy Index after recent record inflows into the iShares Global Clean Energy ETF (ICLN), Bloomberg reports. The underlying benchmark was forced to increase its small 30 constituent portfolio to 100 components to diminish clustering and bolster the ease of trading due to the sudden influx in investor interest.
The move is a reflection of the consequences of a broader ESG boom, as $230 billion of new money has been funneled into U.S. equity ETFs this year alone. In the case of S&P Global Clean Energy Index, the sudden influx of new money into a related ETF has caused ETF owners to hold a larger stake in a limited number of companies, potentially raising liquidity risks in case of a sudden sell-off.
“The risk is that the fund gets too big for its britches, especially among smaller names,” Ben Johnson, Morningstar’s global director of ETF research, told Bloomberg. “If you’re not careful, if you try to transact too large a size in a thinly traded name, you’re going to push prices against it.”
Looking ahead, the boom in ESG ETFs could continue and further test indexers. Citigroup Inc. now projects that ESG stock ETFs in the U.S. will accumulate $1 trillion in assets under management by 2030. Citibank analysts argued that the global pandemic has stirred investor demand for companies doing good, especially those with strong labor practices.
Furthermore, demand for tech-focused thematic funds, which also include holdings that fall within the environmental, social, and governance category, and the sustainability boom is further fueling the optimistic projections.
“The past year’s Covid circumstance has accelerated equity ESG ETF adoption,” Citigroup analysts led by Scott Chronert said in a note. “Increased social awareness, and a growing interest in related structural themes, is causing us to rethink the appropriate roadmap for assessing the ESG ETF opportunity.”
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