One theme emerging from the market volatility created by the coronavirus outbreak is the sturdiness of some environmental, social and governance (ESG) ETFs. That trend is receiving renewed attention in the wake of oil’s jaw-dropping collapse below $1 per barrel on Monday.
Some analysts believe the post-virus market environment will lend itself to more ESG ETF launches and while that may be the case, established names such as the FlexShares STOXX US ESG Impact Index Fund (CBOE: ESG) and its global counterpart, the FlexShares STOXX Global ESG Impact Index Fund (CBOE: ESGG), still merit consideration, too.
“Traditional and alternative investment managers (IMs) with the systems, processes, and teams in place to offer credible environmental social and governance (ESG)-oriented investment options could see a competitive advantage in attracting fund inflows and increased investor mandates given the seismic shift in investor attitudes regarding sustainable investing in recent years,” said Fitch Ratings in a recent note.
FlexShares Is ESG Established
In the face of trying virus-induced circumstances, ESG and ESGG performed admirably in the first quarter.
During the first quarter, the returns of sustainable equity funds were clustered in the top halves of their respective categories, and more sustainable funds’ returns ranked in their category’s best quartile than in any other quartile,” according to Morningstar. “The returns of 70% of sustainable equity funds ranked in the top halves of their categories and 44% ranked in their category’s best quartile. By contrast, only 11% of sustainable equity funds finished in their category’s worst quartile.”
That coupled with investors’ growing disdain for traditional energy could spur the creation of more ESG funds because high-level investors are demanding access to more sustainable products.
“ESG offerings related to public equities, and to a lesser extent fixed income, have experienced widespread client mandates and record levels of inflows, which will be a catalyst for increased product offerings by global IMs in coming years,” according to Fitch.
For any ESG ETF issuer, the primary issue is proving to end-users that these offerings can offer better risk-adjusted returns than traditional beta equity products.
“If ESG funds are unable to deliver returns and/or portfolio attributes consistent with investor expectations over a longer period, this could lead to a reversal of asset flows, while creating reputational and/or legal challenges for fund managers,” notes Fitch.
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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.