Experienced investors know that broad market environmental, social, and governance (ESG) exchange traded funds are usually heavily allocated to technology stocks.
Some ESG ETFs really ratchet up exposure to growth stocks and the technology. Take the case of the Invesco ESG Nasdaq 100 ETF (QQMG). QQMG tracks the Nasdaq-100 ESG Index. As the ESG counterpart to the Nasdaq-100 Index (NDX), it’s not surprising that the ESG index features a significant tech weight.
As of August 19, QQMG’s tech weight is almost 62%, or more than quadruple the ETF’s second-largest sector exposure. While some critics argue that ESG ETFs are too dependent on tech stocks, other experts argue that the marriage is a practical one.
“Technology companies help us communicate and share knowledge, create new employment opportunities, fuel economic growth, extend the reach of healthcare, connect people and small businesses to the financial system, and protect our personal digital assets. Each of these issues is at the heart of sustainable development. It would be strange, we think, to ignore them in an ESG fund,” according to AllianceBernstein.
That’s not to say that the combination of ESG ETFs and big tech weights is perfect and completely void of risk. Indeed, there are issues for investors considering QQMG and comparable funds to ponder.
“Of course, tech companies face growing concerns over ESG issues such as data privacy, corporate governance and data-center energy consumption,” added AllianceBernstein. “These are areas where an active equity investor can engage with management and, based on the research engagement, determine whether to own that stock. So, investors with a clear definition of sustainability can identify technology stocks that can be powerful vehicles for positive change and exclude those who don’t meet their criteria.”
Specific to QQMG, the fund devotes over 30% of its weight to Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT). In the eyes of many ESG experts, it’s hard to debate the ESG credentials of those tech titans. Likewise, QQMG has some sensible allocations outside of tech, such as Tesla (NASDAQ:TSLA). Though Tesla would appear to be an automatic ESG stock, some rival ETFs to QQMG don’t hold the electric vehicle maker.
Bottom line: QQMG’s methodology can be a good fit for growth-focused investors as well as those looking to avoid some of the controversies associated with ESG ETFs.
“ESG-focused investing strategies are coming under greater scrutiny. Investors should always make sure that they understand how a fund is investing their assets. But don’t dismiss tech-sector holdings in sustainable funds. Technology stocks are a vital component of the modern global economy and an important agent for positive change that have a natural home in ESG-focused portfolios,” concluded Alliance Bernstein.
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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.
