In looking for ways to diversify a portfolio, investors may look to exchange traded funds that target environmental, social and governance, or ESG, principles.
ESG assets have more than doubled in 2019, but most of the assets are still concentrated among the largest strategies, including the iShares ESG MSCI USA Leaders ETF (SUSL), iShares MSCI KLD 400 Social ETF (DSI), Xtrackers MSCI USA ESG Leaders Equity ETF (NYSE Arca: USSG) and iShares MSCI USA ESG Select ETF (NYSEARCA: SUSA), CNBC reports.
However, ESG and the broader socially responsible theme have not widely received by U.S. investors. There are 87 ESG-related ETF products with about $16 billion in assets under management, which is only a fraction of the larger $4 trillion ETF industry. On the other hand, Europeans have been more receptive of the ESG-theme, with $124 billion in Europe-listed ESG ETFs.
The relative low assets in ESG ETFs, though, makes the segment a good opportunity for the ETF industry to continue to grow.
There is a fear that ESG may be gimmicky or just a feel-good investment with little else to show. However, Luke Oliver, head of index investing for the Americas at DWS Group, argued that the key misconceptions about ESG are that investors do not have to give up returns or make some kind of activist play by buying into these stocks.
“Our objective is to look like [these benchmarks], but to be aware of the E, S and G,” Oliver told CNBC.
For example, the Xtrackers S&P 500 ESG ETF (NYSE Arca: SNPE) includes a position in ExxonMobile (NYSE: XOM), something that many would not hold up against good environmental principles.
“You would think, ‘Energy company, that’s got to be bad for the environment.’ But we pick the better ESG-scoring energy companies and [they]are some of the biggest spenders in renewable energy,” Oliver said.
Todd Rosenbluth, head of ETFs and mutual fund research at CFRA, argued that cheap costs could also draw in more interest.
“People have historically thought [ESG] was a premium product,” Rosenbluth told CNBC. “But now the costs have come down and they’re more likely to come and take a look.”
For more information on ESG strategies, visit our socially responsible ETFs category.