Legacy environmental, social, and governance (ESG) exchange traded funds typically deploy exclusionary tactics, meaning that those funds don’t feature allocations to “sin stocks” such as alcohol, cannabis, gambling, and tobacco. Nor do those products feature exposure to firearms makers and fossil fuels producers, among others. Indeed, exclusionary tactics have worked in favor of ESG ETFs and their investors. A newer generation of funds in this category does things differently, including the SPDR S&P 500 ESG ETF (EFIV).
EFIV, which follows the S&P 500 ESG Index, turns three years old, and with its underlying index closing in on its fourth birthday, it could be a good time to evaluate the ETF’s long-term potential.
“From its launch date until the end of 2022, the ESG index outperformed its benchmark, the S&P 500, by a cumulative 9.16% (impressive in the context of a benchmark that is notoriously hard to beat),” noted S&P Dow Jones Indices.
Further analyzing why EFIV’s underlying index has a penchant for outperforming the parent gauge, S&P broke the traditional S&P 500 into quintiles sorted by ESG scores. Avoiding the lowest-scoring names helped the performance of EFIV’s index, indicating that another form of exclusion is relevant and beneficial in the case of this ETF.
“Most strikingly, underweighting the lowest ESG-scoring constituents contributed the most to the S&P 500 ESG Index’s outperformance. Specifically, the Low ESG Quintile 5 underperformed S&P 500 by -16.9%, the S&P 500 ESG Index underweighted this quintile by an average of 10.2%, and the combined effect was to generate 4.18% in excess return for the S&P 500 ESG Index,” added S&P.
While plenty of S&P 500 stocks are excluded from EFIV, that doesn’t mean that investors must sacrifice depth with this ETF. Nor does it mean they’re exposed to sector concentration risk. EFIV holds 303 stocks, and its sector weights are mostly comparable to those of the traditional S&P 500.
Also notable when considering EFIV is the point that the stocks in the lowest ESG quintile consistently lagged over the four years that the S&P 500 ESG Index has been around.
“Of course, performance drivers can (and do) change over time. ESG-based attribution analysis such as these can offer insight and perspective as markets and conditions evolve. Investors seeking similar attributions for a range of our flagship indices are now able to find them,” concluded S&P.
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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.