Right now, it’s good to be green—despite the coronavirus outbreak, environmental, social and governance (ESG) companies are thriving amid the chaos. In fact, a good number of exchange-traded funds (ETFs) are outperforming broader indexes.
“Amid plunging stock markets, ESG investments have fared better than the overall market. During March, 62 percent of ESG-focused large-cap equity funds outperformed that index, according to Morningstar,” a Green Biz article said. “So far this year, 59 percent of U.S. exchange-traded funds focused on ESG performance are beating the S&P 500 Index, according to Bloomberg Intelligence. That outperformance could spur further demand for ESG funds — an area already attracting growing investment before the pandemic hit.”
What’s driving the performance of ESG-related ETFs? One of the reasons is strong fundamentals—per the Green Biz article, market observers “believe that strong ESG performance indicates better management, which translates into stronger long-term returns. The idea is that management teams that do a good job of minimizing their environmental footprint, promoting good employee relations and creating resilient governance structures are more likely to be adept at running all other aspects of a company’s business.”
“ESG funds tend to be biased towards higher-quality companies with a stronger balance sheet, companies that are run better and operate more efficiently,” Hortense Bioy, director of passive strategies and sustainability research at Morningstar, told the Financial Times.
ESG ETFs to Consider Now
Investors who want ESG exposure via an ETF wrapper can take look at the Xtrackers MSCI EAFE ESG Leaders Equity ETF (EASG). EASG seeks investment results that correspond generally to the performance of the MSCI EAFE ESG Leaders Index.
The fund will invest at least 80% of its total assets (but typically far more) in component securities (including depositary receipts in respect of such securities) of the underlying index. The underlying index is a capitalization-weighted index that provides exposure to companies with high ESG performance relative to their sector peers.
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. One way to approach the current market environment is to take a one-size-fits-all approach with funds like the Xtrackers FTSE Developed ex US Comprehensive Factor ETF (NYSEArca: DEEF).
DEEF seeks investment results that correspond generally to the performance of the FTSE Developed ex US Comprehensive Factor Index. The index is designed to track the equity market performance of companies in developed countries selected on the investment style criteria of value, momentum, quality, low volatility, and size.
For more market trends, visit ETF Trends.