Owing to the heavy concentrations of growth sectors in many traditional environmental, social, and governance (ESG) exchange traded funds, investors often view those funds as home to expensive stocks.
Likewise, investors often assume that stocks with wide moat characteristics are richly valued. Indeed, that’s usually the case, but after the broader market’s first-half slump, there are attractive valuations to be found on some wide moat stocks, including those with favorable ESG traits.
Among exchange traded funds, the VanEck Morningstar ESG Moat ETF (CBOE:MOTE) is a premier idea for the ESG/wide moat combination. Various reasons explain why MOTE is a relevant consideration for ESG-minded value investors.
“Value stocks trade at low prices relative to their fundamental values. Equity value indices such as the MSCI Value index typically include stocks in companies known to have a higher carbon intensity and lower ESG scores than those in the corresponding market-capitalisation benchmarks,” according to BNP Paribas research.
For ESG investors, the problem with traditional value strategies is that those products are often heavily tilted to sectors with elevated ESG risk. Those include energy, materials, and utilities. For its part, MOTE allocates just 4.4% of its total weight to energy and materials stocks and has no exposure to the utilities sector.
Indeed, experts agree that some old guard value benchmarks are of little use to investors prioritizing ESG. That could be a sign that a fund such as MOTE could have inroads for attracting more investors, particularly with value stocks performing well.
“For investors seeking sustainable investments then, the MSCI Value index would have no appeal. However, does value investing need to be like this? Can we construct a value portfolio with a lower carbon intensity and a higher ESG score than that of the corresponding market-capitalisation index that delivers at least the same performance and exhibits value style characteristics? We believe so,” added BNP Paribas.
While MOTE isn’t a dedicated value fund, its underlying index attempts to find wide moat stocks trading at attractive multiples. Over the long haul, that objective coupled with the ESG focus could benefit investors because that combination has outperformed standard value strategies.
“On average, a value strategy can be made sustainable by reducing sector biases relative to a market-cap index and focusing on more profitable and lower risk cheap stocks,” concluded BNP Paribas. “Despite occasional headwinds, we would expect such a strategy to outperform a non-sustainable value strategy in the medium to long term.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.