President Joseph R. Biden signed the Inflation Reduction Act into law on Tuesday, the largest climate spending package in U.S. history, earmarking $369 billion for climate and energy policies. Prior to President Biden signing the bill into law, investors had been pumping money into investment funds focused on green energy this month. In fact, environmental, social, and governance investing has been gaining in popularity for years.
According to Morningstar, funds that allocate investor money according to ESG issues held $357 billion at the end of 2021. That’s more than four times the total three years earlier. Last year, investors poured $69.2 billion into ESG funds, an annual record.
“An individual investor has a lot more [ESG options] and can build a portfolio in ways they couldn’t 10 years ago,” Michael Young, manager of education programs at the Forum for Sustainable and Responsible Investment, told CNBC. “Almost every [asset] category I can think of has a fund option, so we’ve come a long way.”
Now, in addition to wanting to invest based on ESG principles, investors are also wanting to back companies that have free cash flow, given the current market volatility and record-high inflation. Free cash flow represents the cash a company has available to use on repaying creditors or sending dividends to investors.
The FCF US Quality ETF (TTAC) invests in companies that have strong free cash flow characteristics, while also rating its holdings based on ESG criteria. The actively managed TTAC aims to outperform the Russell 3000 through a fundamentals-driven investment process that selects about 150 stocks based on free cash flow strength, according to its FactSet Analyst Report.
Its holdings are then weighted by a modified market-cap log transformation, which allows for increased exposure to companies with the strongest proprietary free cash flow rankings. After that, the portfolio will be rated with an ESG score, excluding companies with low ESG ratings. Firms with an extreme rise in shares count and increase in leverage are excluded.
“Stocks of companies with strong free cash flow profitability have performed relatively well over time historically,” said Todd Rosenbluth, head of research at VettaFi. “An ETF that prioritizes a collection of these companies across sectors stands out in a crowded market.”
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