Luke Oliver, Head of Index Investing for DWS, sat down with Todd Rosenbluth, Head of ETF & Mutual Fund Research at CFRA, to discuss ESG strategies based on some recently launched products.
As Oliver notes, DWS has seen an uptick in flows towards those products. He asks Rosenbluth what there is to know about ESG trends. Rosenbluth begins by noting how the US investors are embracing ESG-oriented ETFs more now than in prior years.
“In 2019, we’ve seen more than $4 billion of net new inflows, and the asset base has pretty much doubled in just this year alone,” Rosenbluth states.
$1.2 billion falls under DWS’ ESG ETFs, putting the company at the forefront of that trend. At the same time, Oliver notes how the European investors have picked up on this earlier than the US. Now, places such as Asia seem to have ESG picking up more momentum.
As Rosenbluth explains, there’s greater global interest in ESG. That said, education is improving. Investors want to understand more of what makes it into a portfolio, so this is where the due diligence comes in handy.
Oliver also asks about reports claiming ESG is better in an active strategy as opposed to a passive one. Rosenbluth notes how investors are continuing to embrace the ETF wrapper and looking at ESG-oriented products.
“ESG ETFs are increasingly gaining investor interest,” states Rosenbluth.
ESG Can Follow An Indexed Rule Book
It’s also worth stating how ESG can follow an indexed rule book, the same way that applies to traditional quality or low volatility. So, the cost savings received from an index-based approach helps to alleviate some of the performance pressures that might happen with a higher fee product.
Oliver also believes it’s worth noting the index construction takes into account a lot of detail, as well as research and analysis.
“The idea that you’re passive in no way takes away from the amount of detail and work that’s gone into selecting those ESG stocks,” Oliver adds.
“It’s an evolving situation,” Rosenbluth continues. Companies can fail yet improve over time, which is an essential factor to keep in mind. Investors will have to monitor what’s inside the portfolio because it isn’t static.
Applying ESG To A Portfolio
When asked about ESG being a way for investors to do good in their portfolio, Rosenbluth explains how, historically, ESG ETF interest was held back by the thought of having to give something up for the sake of granting exposure to socially responsible strategies. However, he believes asset managers and ETF providers are delivering the right education to show what can be received, while still working with something meaningful.
Oliver adds how some clients think of this as a way of maintaining a diversified portfolio. Still, there is another connotation in the US that sees ESG ETFs as ones coming at the risk of returns or higher standard deviation for the sake of doing good.
In countering this, Oliver explains, “We try to lean towards sector neutrality, lower tracking error, similar risk profiles to the underlying benchmark.”
Rosenbluth sees things similar, noting how CFRA has clients interested in staying well-diversified and not paying a lot. The clients want to get the cost-savings they can pass along if they cog with an index-based approach. Helping matters is the products that have come to market in 2019, which are focused on lower-cost, being well-diversified across the sectors, and the various pillars of ESG.
Oliver also wants to make clear how ESG is a sign of fundamentally strong ways of looking at companies, and not being previously looked at shouldn’t mean it’s working against anything. Taking these ideas into consideration, if anything, will have a decidedly financial economic impact on companies, as opposed to risk.
“In terms of things like product safety or sustainable pipeline or the fact that you’ve got good governance of the business, these things really resonate with investors outside of just that EST “doing good” brand,” Oliver states.
There are lots of smart decisions that can be made, which includes applying the standards set when incorporating ESG.
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