How Sustainable Funds Got Their Grooves Back | ETF Trends

Sustainable and ESG ETFs are rebounding this year following some dismal performances in 2022. It’s easy to understand why: Growth stocks are the primary drivers of broader market upside in 2023.

That’s good news for investors involved in ETFs such as the Invesco ESG Nasdaq 100 ETF (QQMG) and the Invesco ESG NASDAQ Next Gen 100 ETF (QQJG) – a two growth-heavy ESG funds. It’s often said that when ESG funds deliver out-performance, growth tilts are the reason why. That statement is often framed as a criticism.

With QQMG and QQJG up 36.36% and 9.42%, respectively, year-to-date, investors are unlikely to quibble about those ETFs’ growth exposures.

“In the first half of 2023, sustainable funds saw a median return of 6.9%, beating traditional funds’ 3.8% and reversing their underperformance in 2022, according to a new “Sustainable Reality” report from the Morgan Stanley Institute for Sustainable Investing. Investor demand also remained strong as sustainable funds’ assets under management (AUM) reached record levels,” notes the bank.

Good News for ESG ETFs

Broadly speaking, there’s no denying that this year’s growth stock resurgence is propelling ESG offerings such as QQMG and QQJG. However, there are other bullish considerations, including the point that investors are again allocating capital to sustainable funds.

“In the first half of the year, sustainable funds attracted cumulative inflows of $57 billion. Almost all flows were in Europe. That brought assets under management (AUM) to more than $3.1 trillion—or almost 8% of total global AUM—by the end of June, though still short of a record reached in 2021,” adds Morgan Stanley.

European investors have long been fond of ESG strategies. So, it’s not surprising those market participants are renewing that enthusiasm as growth equities rally. However, the aforementioned data points also indicate some investors in the U.S. are waiting to revisit ETFs such as QQMG and QQJG.

Perhaps they need more convincing. That convincing could arrive on the back of more growth stock upside in the second half. That’s a scenario likely to benefit the two Invesco ETFs.

“Should prevailing market conditions persist in the latter half of 2023, sustainable funds should continue to benefit, given their more growth-oriented, longer-term positioning. However, a return to a market environment that favors value or shorter-term assets has the potential to impact future performance, as seen in 2022,” concludes Morgan Stanley.

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