Investors don’t have to sacrifice exposure to innovative companies in the name of embracing environmental, social, and governance (ESG) principles.
In fact, some exchange traded funds efficiently marry those two concepts, with the Invesco ESG NASDAQ100 ETF (QQMG) ranking as one of the premier names in this group. QQMG debuted last October as the ESG alternative to traditional Nasdaq 100 Index (NDX) exchange traded funds. The fund follows that benchmark’s ESG counterpart, the Nasdaq-100 ESG Index.
ESG ratings and scoring remain fluid across index providers, so it’s pivotal for investors to look under the hood at exactly what an ESG ETF includes and excludes at the holdings level. For its part, QQMG has a traditional approach in that it excludes alcohol, cannabis, and tobacco stocks; casino operators and other gambling firms; fossil fuels and nuclear power producers; and civilian and military weapons manufacturers.
However, the Invesco fund goes a step further by only including companies that are in line with the United Nations Global Compact principles. And since it tracks an offshoot of the Nasdaq-100, QQMG is tech-heavy, with a 61.52% allocation to that sector.
“The recent outperformance of technology stocks, which tend to have better ESG scores, and the concurrent underperformance of generally lower-scoring fossil fuel energy stocks—two trends enhanced by the work-from-home conditions of the pandemic—give ESG stocks a recent performance tailwind,” says Morningstar’s Don Phillips.
Many QQMG components, including Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), and Tesla (NASDAQ:TSLA), give employees the sense that their work is driving change, be it better environmental sustainability or improving social issues. Phillips highlights the importance of that from an investment perspective.
Smart companies are looking “to make employment at their firms seem like part of a bigger cause or mission and not just a paycheck. People want to believe they are part of something bigger, that their actions have significance to the world around them. ESG-themed funds hold the potential to forge such bonds,” Phillips notes.
Another overlooked element could work in QQMG’s favor over the long haul, potentially luring more investors to the fund: connectedness. In other words, investors increasingly want to feel as though their financial well-being is contributing to something more than just their own wallets.
“I believe that ESG connects in a firmer way and has the potential to deepen the commitment investors have to their portfolios and thus help them stay the course when others abandon ship. The story ultimately may be told by the money-weighted investor returns, not by time-weighted performance calculations,” concludes Phillips.
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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.