Exchange traded funds that track environmental, social, and governance principles help investors target socially responsible investments, but it is still crucial to look under the hood to completely divest away from fossil fuels.
According to CFRA, many of the largest ESG-related ETFs provide sector exposures that are very similar to the broadest equity funds, which means that they will have some energy sector exposure, MarketWatch reports.
“While some investors think of ESG ETFs solely based on the Environmentally friendly pillar and presume there is little to no energy exposure, the most popular U.S. ESG ETFs look a lot like the broader equity market from the top-down,” CFRA’s head of mutual fund and ETF research, Todd Rosenbluth, wrote in a recent note.
Specifically, the S&P 500 Index includes about a 3.0% tilt toward energy stocks. This same percentage weight toward the energy sector is also similar to the energy sector weights found within the largest ESG-themed ETFs.
Rosenbluth noted that with holdings that track each other so closely, it may not be too surprising that ESG ETFs and the S&P 500 Index are performing relatively similarly year-to-date.
“Some investors have a false impression that they need to give up market-like returns when prioritizing doing good,” Rosenbluth said. “However, Broad ESG ETFs were built to serve as the potential core of the portfolio by choosing companies with relatively strong ESG attributes within a sector.”
Some investors may question the validity of these types of ‘ESG’ funds that seem to simply reflect traditional broad-market trackers, albeit with some slight adjustments based on ESG scores.
Specifically, it is important to note that ESG is more than the ‘E’ or environmental factor. The broad theme also includes social and governance factors too. Consequently, while fossil fuel companies may not pass the grade on the environmental scale, these energy producers can have high scores on the social and governance factors.
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