As the universe of environmental, social, and governance (ESG) investing continues its rapid pace of expansion and asset-gathering proficiency, some newer funds in the space are more nuanced and complex. Those products may be appealing to some investors, but many market participants that are enthusiastic about ESG still prefer easy-to-understand approaches. In the world of exchange traded funds, the Invesco ESG Nasdaq 100 ETF (QQMG) answers that call.
QQMG, which is the ESG counterpart to the popular Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM), takes an exclusionary approach to delivering ESG to investors. That methodology is tried and true in the world of ESG investing.
“Managers of ESG investment products commonly use two strategies for selecting investments: exclusionary and inclusionary. The exclusionary approach typically avoids industries that don’t meet certain criteria or standards. For example, a fund employing an exclusionary approach may include all the companies from a major stock index except for those in the oil, mining, and tobacco industries,” according to Charles Schwab research.
QQMG’s exclusions include the basics such as alcohol, cannabis, fossil fuels producers, casino operators, nuclear power firms, and tobacco companies, among others. The Invesco ETF also mandates that member firms are in line with the United Nations Global Compact principles. That’s a potential plus for investors because there are growing concerns about the bumpiness and lack of uniformity associated with ESG ratings and scoring.
“Rating criteria can be inconsistent, which can make it difficult to directly compare products. For example, some ratings focus more on corporate governance while others focus on the environment. And when it comes to ESG investment products, managers may each also use different criteria based on their stated investment strategy,” added Schwab.
Over 58% of QQMG’s holdings are classified as growth stocks, which is relevant because many of the sectors investors associate with growth are homes to companies that often score well when it comes to ESG. Those include technology and communications services, which combine for 73% of the QQMG portfolio. Importantly, companies with strong ESG ratings tend to perform well over long holding periods.
“A 2021 meta-analysis found a positive correlation between a company’s financial and investment performance and its ESG business practices. The results suggest that companies with positive ESG business practices often had better financial performance over a longer time frame, provided some protection against social and economic crises, had better risk management, and more,” concluded Schwab.
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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.