Momentum Builds For ESG ETFs

One of the fastest-growing concepts in the world of exchange-traded funds is the notion of ETFs based on environmental, social and governance (ESG) principles. Whether it is ETFs based on religious values, gender diversification or the exclusion of fossil fuels producers, the population of U.S.-listed ESG ETFs is booming.

There are over 30 ESG-based ETFs trading in the United States, and that number is expected to grow as more investors embrace ESG principles. In fact, data suggest investors are eagerly embracing ESG funds. Potentially bolstering the fortunes of ESG ETFs going forward is the fact that many investors are realizing they do not need to sacrifice returns to apply virtue to their investments.

The ESG Strategy

A study by State Street Global Advisors (SSgA) “study demonstrated a clear shift away from the assumption that incorporating ESG criteria involves sacrificing performance. In fact, the majority (75 percent) of surveyed investors expect the same returns from their ESG investments as they do from others,” said SSgA. “Further, the vast majority (84 percent) of respondents were satisfied with the financial performance of their ESG strategy, including 31 percent who were very satisfied.”

SSgA, the third-largest U.S. ETF issuer, sponsors some successful ESG ETFs, including the SPDR SSGA Gender Diversity Index ETF SHE. SHE, which debuted in March 2016, is now home to nearly $294 million in assets under management. That makes the ETF one of the most successful ETFs to come to market last year.

Taking On SHE

SHE has proven itself to be one of the better ESG ideas in the ETF space. Over the past five years, the S&P 500 member firms with the highest percentage of female board members “outperformed the broader index by 300 basis points (bps) per year” while topping the 20 S&P 500 companies with the lowest percentage of female board members by an average of 500 basis points per year. SHE tracks the SSGA Gender Diversity Index.

Data suggest investors are already enthusiastic about ESG ETFs. Six such ETFs listed in the United States, including SHE, already have more than $100 million in assets under management.

“Our study confirms that acceptance is already widespread. In fact, the vast majority (80 percent) of respondents said they have some form of ESG strategy within their portfolios,” said SSgA. “This result may suggest that investors’ interpretation of ESG investing is wide-ranging, with investors using a variety of potential styles and tools to implement their responsible investing objectives.”

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