An Easy, Profitable Way to Nail The 'E' In ESG Investing

Among many things investors have heard a lot about this year are the laggard status of the energy sector and the rising popularity of environmental, social and governance (ESG) strategies.

When it comes to ESG exchange traded funds, the “E” is usually the easiest part of the acronym to identify. Traditional funds in this group are apt to exclude fossil fuels producers while favoring companies that are environmentally sound, regardless of sector or industry.

With the Energy Select Sector SPDR XLE up just 3.96% this year and the energy sector's weight in the S&P 500 dwindling, it's not a stretch to say investors have been rewarded by avoiding traditional energy stocks.

Why It's Important

Up 25.56% after hitting an all-time high Thursday, the ProShares S&P 500 ex-Energy ETF SPXE proves as much. SPXE may not be an ESG ETF in the truest sense of the term, but as its name implies, it overtly discards energy stocks. The strategy is working because SPXE is topping the S&P 500 by 170 basis points year to date.

SPXE follows the S&P 500 Ex-Energy Index. To make up for the loss of the 4.52% the traditional S&P 500 devotes to energy equities, the ProShares fund is slightly over weight technology, health care, financial services and communication services stocks, among other groups.

SPXE does an admirable job of spreading energy's weight around because the ProShares fund is actually modestly overweight the remaining 10 S&P 500 sectors, even materials which can be an environmental offender in its own right.

What's Next

SPXE “offers investors a way to reduce or even eliminate exposure to a sector they believe may underperform,” according to Maryland-based ProShares. “It can serve as a risk management tool for investors who have a large exposure to energy.”

In other words, the primary risk with SPXE is obvious: if XLE and rival energy ETFs takeoff and become a leadership group, SPXE could wind up lagging the S&P 500.

With alternative energy taking off and becoming cheap to use, however, SPXE has credibility for environmentally conscious long-term investors looking for an effective core holding.

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