Environmental, social, and governance (ESG) exchange traded funds are enduring some criticism this year on the performance front. However, flows data indicate that investors remain enthusiastic about ESG on a long-term basis.
That’s a positive sign for the ever-growing ESG ETF constituency, including established names such as the SPDR S&P ESG ETF (EFIV). ESG follows the S&P 500 ESG Index, and part of that allure is that the fund offers a simplified, streamlined approach to ESG investing.
That’s relevant today because so many advisors and investors who express interest in ESG also express concern that defining this style of investing is increasingly confusing.
“Currently, there’s no single standard for how ESG information should be analyzed and disclosed. Because of this, investors tend to rely heavily on generalized ESG ‘scores’ provided by a handful of vendors. Scores, however, have very little consistency across vendors, and none of them validate the link with firms’ performance on the E, S, or G dimension,” according to BlackRock research.
At its core, EFIV is designed to feature similar sector allocations to those found in the traditional S&P 500 while providing an ESG overlay. As such, EFIV’s lineup is reduced to a still-deep 308 stocks from the more than 500 found in a standard S&P 500 ETF. Even with its relatively simple approach, EFIV taps into some of the benefits of an ESG focus.
“ESG-related data also provides a distinct way to capture how companies, within each sector and industry, are innovating and adapting to thrive as the economy transitions to carbon neutrality. This is just one of the many powerful alpha opportunities that can be uncovered with ESG data analysis,” added BlackRock.
In other words, when an ESG strategy is constructed the right way, it can offer out-performance potential. For its part, EFIV is narrowly outperforming the S&P 500 while handily topping the widely observed MSCI USA Extended ESG Select Index.
In other words, EFIV can be an avenue for investors searching for not only a basket of companies with strong ESG credentials, but those with the ability to outperform over long time horizons.
“ESG goals are not just about investing in companies the promote the best environmental, societal, and governance outcomes. Rather, looking at the investment universe from the lens of an ESG prism gives investors an even more comprehensive framework for how to identify companies that are best positioned for future long-term profitability, and hence, alpha opportunities for investors,” concluded BlackRock.
For more news, information, and strategy, 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.