March could end up being seen as a turning point for the perception of ESG-branded strategies from “feel-good story” to “legitimate investment thesis.”
ETF Trends spoke with Jordan Farris, Managing Director, Head of ETF Product Development at Nuveen, about the various perceptions investors and advisors may currently have in regards to risk management and ESG-branded strategies, in addition to thoughts on how the market may react, once things begin reopening on a broader level.
As Farris explains, when clients are talking about risk management, it’s from the perspective of lower volatility or avoiding companies that may contribute to underperformance. So, in terms of risk management to reduce volatility and risk within a portfolio, there are many clients putting a different emphasis on things when it comes to why Nuveen didn’t own stock in some big companies.
“Outperformance during the downturn was the norm as opposed to the exception,” Farris states.
The reality is, not due to Covid-19, but because of other issues with companies like Carnival, United, and others as far as their ESG scores. That said, Farris does have something to say about Nuveen’s pursuit of a suite level amount of ESG friendly funds.
As it stands, Nuveen has had positive flows across its entire suite of ETF funds when it comes to ESG, year-to-date. It’s been heaviest in the two large cap products, the Nuveen ESG Large-Cap Value ETF (NULV) and the Nuveen ESG Large-Cap Growth ETF (NULG). Additionally, its small cap fund Nuveen ESG Small-Cap ETF (NUSC) was the first to take off, so the flows have been strong there as well.
There’s also the Nuveen ESG U.S. Aggregate Bond ETF (NUBD), which has seen decent flows as well. The mid-caps have similarly done better than expected although part of that comes from the benchmarks set by the large cap products, which helps with mid-cap exposure.
“We are promoting the suite as in, ‘Here’s one solution to your ESG needs,’ and we’re generally seeing pretty broad options across the suite, as opposed to one product being $500 million worth of flows, and nothing else,” Farris notes. All of this in mind, 8 of 10 Nuveen ESG-branded ETFs outperformed the non-ESG parent index during Q1.
As far as other products factoring into the ESG area, and worth making a note of, there’s Nuveen’s Short-Term REIT ETF (NURE). It has underperformed substantially during the downturn, which was not unexpected, given the overweight in the hotel sector. However, coming out of the credit crisis, the outperformance was substantial at that point in time.
That in mind, the market coming out of that may offer similarities in terms of when to approach opening the economy back up currently. Travel, vacations, real estate – those are areas geared for getting a restart soon enough. Farris believes NURE, which invests in short-term lease agreements, to do quite well over the next couple of years, as the country moves through the first couple of phases of reopening.
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