Growth stocks are struggling on a year-to-date basis, and that scenario is exerting some pressure on some environmental, social, and governance (ESG) exchange traded funds because many of those ETFs are heavy on technology and some other growth-centric sectors.
One way of employing the advantages of ESG while not being excessively weighted to technology stocks is to take advantage of the SPDR MSCI ACWI Low Carbon Target ETF (LOWC). LOWC, which tracks the MSCI ACWI Low Carbon Index, allocates 22.5% of its weight to tech stocks. As a result, the fund is slightly outperforming the S&P 500 on a year-to-date basis.
“If you have a significant ESG-driven growth tilt to your portfolio and your year-to-date returns are causing you too much discomfort, that’s an indicator that you may need more stylistic balance in your portfolio over the long run. You can do this by adding value funds to your portfolio,” says Morningstar analyst Jon Hale.
Mixing value funds or ETFs with ESG counterparts isn’t a bad idea, but it can be capital-intensive. Fortunately, LOWC checks some value boxes, as it allocates 16.2% of its weight to financial services stocks, which is also a sign that it offers some protection against rising interest rates.
LOWC’s depth of nearly 1,900 stocks and its global approach make it potentially ideal for investors looking to make ESG investing a long-term cornerstone of portfolios. And it is important to take the long view of this investment style.
“Look at it this way: All investors invest to receive the risk-adjusted return they require to reach their overall financial goals. In so doing, they are getting what’s known in the behavioral-finance world as a utilitarian benefit that results from their purchase of an investment product,” adds Hale.
At its core, LOWC, which includes large- and mid-cap stocks, provides investors with a basket of stocks that dodge carbon emitters and fossil fuel producers while still offering a broad-based portfolio. Overall, LOWC can be seen as a “best of both worlds” fund with an ESG approach to value and without excessive growth exposure.
“Pricey growth stocks that tend to be over-represented in many ESG equity portfolios have taken hits in the correction, and value stocks, including fossil-fuels-based energy stocks, have led the market,” concludes Hale.
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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.