The Tell: ‘ESG’ funds have more energy exposure than you might think


Many of the largest exchange-traded funds that market themselves as having environmental, social and governance characteristics offer sector exposure that’s very similar to the broadest equity funds, according to an analysis published Tuesday from CFRA.

Those similarities may be most meaningful, and questionable, when it comes to energy, which is among the more controversial sectors of the market — not to mention one of the more financially weighty.

“While some investors think of ESG ETFs solely based on the Environmentally friendly pillar and presume there is little to no energy exposure, the most popular U.S. ESG ETFs look a lot like the broader equity market from the top-down,” CFRA’s head of mutual fund and ETF research, Todd Rosenbluth, wrote.

Related: Sustainable-investing flows have smashed records in 2020. What’s going on?

The Energy Select Sector SPDR
which tracks the S&P 500 Index’s energy sector, lost 33% in 2020 as OPEC+ members splintered over production cuts and the coronavirus lockdowns rippled across the globe. But this year, with more discipline among the producers and investor enthusiasm over economic reopenings, the fund gained 41% through March 12.

Rosenbluth offers one example of what that means in real life: the iShares Core S&P 500 ETF
one of the biggest, broadest, stock trackers in the market, has 3% of its portfolio devoted to energy. That compares to a 2.9% weighting for the iShares ESG Aware MSCI USA ETF

and 3.1% – that is, more than the broader ETF – for another ESG-themed fund, the Xtrackers S&P 500 ESG ETF

With holdings that track each other so closely, it may not be surprising that ESG ETFs and the S&P 500 index are performing relatively the same in the year to date.

Through March 12, IVV had returned 5.4%; three broad ESG ETFs in Rosenbluth’s analysis outperformed it slightly and three underperformed it slightly, with returns ranging from 4.9% to 5.9%.

“Some investors have a false impression that they need to give up market-like returns when prioritizing doing good,” Rosenbluth wrote. “However, Broad ESG ETFs were built to serve as the potential core of the portfolio by choosing companies with relatively strong ESG attributes within a sector.”

Still, some investors may question the validity of funds calling themselves “ESG” if they seem to simply mimic traditional broad-market trackers. For many, “relatively strong ESG attributes” may simply not apply to fossil-fuel companies.

See: As boomers hand over the keys to the stock market, sustainability-minded younger investors let their consciences lead

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