ESG, Mega-Cap Durability Meet in This ETF | ETF Trends

Much to the relief of many investors, mega-cap growth stocks are playing pivotal roles in supporting the 2023 broader equity market resurgence. That’s welcomed news for market participants on a variety of fronts, including beyond basic growth funds.

Rebounding large- and mega-cap growth stocks could also be supportive of upside for a slew of environmental, social, and governance (ESG) exchange traded funds, including the newly minted Calvert US Select Equity ETF (NYSE Arca: CVSE). Actively managed, CVSE focuses on domestic large-cap equities, though not necessarily growth fare, and attempts to beat the widely followed Russell 1000 Index.

As investors learned in 2022, there’s a clear relationship — a negative one at that — between interest-rate tightening by the Federal Reserve and the performance of growth stocks. Simply put, higher Treasury yields diminish the appeal of growth companies’ future cash flows.

A sharp drop in real rates has typically benefited tech and growth names, but the relationship has grown stronger in recent years,” according to BlackRock. “Monthly changes in real rates have historically explained about 6% of the relative performance of mega-cap tech. However, looking at the last three years of data the explanatory power has risen to more than 25%! The strength of the relationship was on full display last year as the backup in real rates trashed both early and mature growth stocks. The recent reversal in real rates has played a large part in putting the bid back into mega-cap growth names.”

CVSE wasn’t around in 2022, so it didn’t have to contend with the Fed’s seven rate hikes, but the fund could benefit from even incremental loosening of monetary policy. The rookie ETF allocates almost 30% of its roster to tech stocks, proving the aforementioned point.

That thesis could be tested as soon as May 3. That’s the next scheduled meeting of the Federal Open Market Committee (FOMC), and while it wouldn’t be surprising to see the Fed boost rates by 25 basis points one more time, expectations are in place that the central bank might finally deliver much desired clarity regarding when it will considering reducing borrowing costs. Other factors could bode well for growth-heavy funds such as CVSE.

“Today the narrative has shifted to an impaired banking sector and an increased risk of recession. To the extent the Federal Reserve’s hiking is curtailed and investor concerns remain focused on an economic slowdown, tech may regain some of its status,” concluded BlackRock.

For more news, information, and analysis, visit the Responsible Investing 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.