There was a time when environmental, social, and governance (ESG) exchange traded funds were viewed as satellite positions or complements to traditional core holdings, but that moment has passed.
As the ESG ETF arena continues evolving, many of these products are credible core equity holdings with a smaller (though rising) amount of ESG ETFs making inroads in the core fixed income space, too. The trend of ESG ETFs becoming core fixtures in investor portfolios has room to run and explains in part why an article by VettaFi reporter Max Chen was one of the most popular on the site this year.
The piece explores increased adoption of ESG ETFs, such as the SPDR S&P 500 ESG ETF (EFIV), as increasingly prominent additions to investors’ cores. For its part, EFIV is an ideal ESG replacement for a standard broad market equity fund because the fund is the ESG representation of the S&P 500 and holds 304 stocks, confirming it has a diverse lineup.
Additionally, EFIV charges just 0.10% per year, which is among the lowest annual fees in the ESG ETF category. As VettaFi’s head of research Todd Rosenbluth noted in early 2022, ESG ETFs performed well in 2021 due to growth stocks soaring, which stoked inflows to these funds, but he added that this scenario should compel investors to do some homework regarding ESG ETFs.
“It’s really important to look at what you’re getting with an ETF, and not just the fee or not just the asset manager,” Rosenbluth said. “Investors need to decide: Are they comfortable with stock-specific risks — i.e., a double-digit weighting in Microsoft and no Amazon and no Apple — or do they want something more broadly aligned with the market?”
Another point to consider is that as the universe of ESG ETFs continues expanding, so does the number of funds that are viable core options, and that includes more than just large-cap fare. For example, the SPDR S&P SmallCap 600 ESG ETF (ESIX) is one of the premier options for investors looking for efficient, one-stop access to ESG and small-cap equities.
Likewise, the SPDR Bloomberg SASB Corporate Bond ESG Select ETF (RBND) is an ESG fixed income ETF to watch in 2023. It remains one of a small amount of funds combining investment-grade corporate debt with ESG benefits, and it could be a viable rebound idea next year for income investors because 2022 was one of the worst years on record for bonds.
For more news, information, and analysis, visit the ESG 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.