Fixed Income ESG Funds Were Resilient During the First Quarter

The environmental, social, and governance (ESG) umbrella was reinforced with Teflon coating during the first quarter as ESG funds were resilient against a coronavirus-laden market rainstorm. Not only was ESG weathering the downturn, but it was also outperforming other sectors in the process–both in equity and fixed income.

Equity sustainable funds weathered the first quarter better than conventional funds, helped by a focus on companies with strong environmental, social, and governance profiles and less exposure to energy. So did their fixed-income counterparts,” wrote Benjamin Joseph in Morningstar. “Like a lot of fixed-income strategies, sustainable fixed-income strategies suffered sudden and large losses during the first quarter of 2020 because of the coronavirus pandemic, but they held up better than conventional funds. Six out of 10 sustainable fixed-income strategies finished in the top halves of their Morningstar Categories.”

As mentioned, investors with exposure to both equity and fixed income ESG came out winners in the first quarter, which brings the obvious question. What caused ESG to perform so well?

“Ultimately, the better relative performance of sustainable funds in the first quarter derives mainly from their investment process and security selection, which focuses on companies or countries that have stronger ESG profiles,” Joseph said. “Sustainable ETFs in our list, which for the most part screen the investment universe based on MSCI ESG scores, have done well over 2020’s first quarter relative to their category peers.”

Broad-based ESG exposure can be had with funds like the Vanguard ESG U.S. Stock ETF (ESGV). ESGV seeks to track the performance of the FTSE US All Cap Choice Index, which is market-capitalization weighted, as well as composed of large-, mid-, and small-cap stocks of companies located in the United States that are screened for certain ESG criteria by the index sponsor, which is independent of Vanguard.

ESG in the Hearts of Millenials

ESG is opening up investment opportunities that are catering to millennials who harbor strong ESG initiatives. Millennial investors who are getting their toes wet with factor investing have a litany of options when it comes to choosing which fund suits their portfolios best.

“The escalating coronavirus pandemic has ushered in a new era of stock market volatility, as investors come to terms with consecutive history-making daily swings,” wrote Karen Gilchrist in a CNBC article. “But it has also shone a spotlight on a promising investment opportunity — one that’s been winning the hearts of millennials.”

Investors looking to capitalize on the latest and greatest in millennial market preferences is the Principal Millennials Index ETF (GENY). The fund seeks to provide investment results that closely correspond, before expenses, to the performance of the Nasdaq Global Millennial Opportunity Index.

Under normal circumstances, the fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of companies that compose the index at the time of purchase. The index uses a quantitative model designed to identify equity securities of companies in the Nasdaq Global Index (the “parent index”) that are impacted by the spending and lifestyle activities of the Millennial generation, which refers to people born from 1980 to the mid-2000s.

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