Investors are often encouraged to take long-term views of financial markets and while securities don’t move higher in a linear fashion and there will be bumps along the way, there is something to be said for maintaining a long-term perspective. That’s particularly true when it comes to adding environmental, social, and governance (ESG) principles to a portfolio, indicating exchange traded funds such as the SPDR S&P 500 ESG ETF (EFIV) are increasingly relevant as core holdings.
Investors exercising patience with ESG is also important because a company doesn’t just become ESG credible overnight. It’s a process – one that often takes time. For investors, it’s one worth waiting out because the more pragmatic a public company is in its approach to ESG, not only does it enhance its odds of avoiding greenwashing controversies, but it also increases the probability of better long-term returns.
“Research from the Institute of Materials Resource Management shows that an increased commitment to corporate environmental performance leads to financial benefits after 2 years. Moreover, the analysis shows that this effect holds over longer periods like 3 years and 5 years,” reported Ben Taylor for Trackinsight.
As the ESG answer to traditional S&P 500-tracking ETFs and index funds, EFIV is a potentially sensible long-term portfolio consideration for a broad swath of investors. A patient approach to the ETF may be rewarded over extended holding periods as more initiatives take shape at the corporate level.
“The idea that ESG practices drive long-term financial performance is supported by the Porter Hypothesis which posits that environmental regulation spurs efficiency and innovation as firms strive to find new practices and technologies to reduce harm to the environment,” added Trackinsight.
Obviously, advisors and investors know that when deploying any ETF within a portfolio with long-term intentions, expense ratios matter. To that end, the $706.62 million EFIV is also worth considering because it charges just 0.10% per year or $10 on a $10,000 position. That’s among the most favorable fees in the large-cap ESG ETF category. That makes it easier to hold EFIV for a long period, which may be required for investors to adequately reap the benefits of companies’ ESG efforts.
“The strong performance of ESG companies over the long-term is about more than generating additional cash flow and achieving operational efficiency,” concluded Trackinsight. “Strong performance among ESG companies is also due to the simple fact that the market generally values companies that have this kind of long-term approach to management.”
For more news, information, and analysis, 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.