Socially Responsible ETFs Face a Long Road Ahead

Socially responsible exchange traded funds are touted as a way for investors to incorporate their values into their core portfolio investments without losing out on returns, but the relatively new ETF segment still has some work ahead of it before these strategies become a household name.

Socially responsible ETFs have accumulated $5.7 billion in assets under management, or a third of the $15.4 billion invested in the Parnassus Core Equity fund, the largest actively managed ESG-focused mutual fund, and only a sliver of the broader $3 trillion U.S.-listed ETF universe.

“I do think that ESG will be a growth industry for fund providers eventually, but it will take time for assets to move into these products,” Todd Rosenbluth, director of fund research at CFRA, told Reuters, referring to the investments that focus on environmental, social and governance principles. “Investors in ESG products tend to be more patient and care less about performance than investors in traditionally-managed products, so there might not be the same push to pull assets when a product has underperformed.”

The slow adoption in ESG and socially responsible ETFs mark a stark contrast to the big changes in the rest of the fund space. Investors yanked $264.5 billion out of U.S. actively managed equity mutual funds in 2016 and pumped a record $382 billion into ETFs.

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While more have grown weary of active mutual funds, investors remain loyal to ESG-focused actively managed funds mainly due to the required research and stock selection necessary for sustainable strategies, which is not easily replicated in an index format like those found in ETFs.