Business & Investment

S & P’s energy sector surged more than 50% last year, but how could Green Fund catch up with the stock market?

Fossil fuel energy stocks soared in 2021. This can be devastating to the performance of sustainable exchange-traded funds, but about half of the largest ESG services were superior to the S & P 500.

But like many funds, equity selection rather than sector bias is the main reason, said Todd Rosenbles, CFRA’s ETF Research Director.

Many ESG ETFs held some of the biggest technology names that helped strengthen broader indexes such as Apple.
AAPL,

Amazon
AMZN,

Tesla
TSLA,

Nvidia
NVDA

And Microsoft
MSFT..

Weighting is also important.Some were overweight with some key names for wider indexes
SPX..

The technology sector will rise by about 35% in 2021 and will be the largest sector with 29% of the S & P 500. Energy, on the other hand, is one of the smallest S & P 500 sectors at 2.7%, limiting the impact of the 53% surge. Last year’s total return on the S & P 500 was 28.7%.

Rosen Bruce said there was recognition that a wide range of ESGETFs would be overlooked during the recovery of the energy sector. He knew it was wrong. “Energy is a very small part of the wider market, so it won’t hurt their performance so much.”

Some of the largest ESGETFs are sector-neutral funds, designed to have similar exposures to the broader market exposures they track, and may replace traditional core holdings. Energy companies may be included in ESGETF if they have a high social or corporate governance score.

Owning an energy name did not always lead to outperformance. The best example is the iShares ESG Aware MSCI USA ETF.
ESGU,

The largest ESGETF by assets under management is $ 25.7 billion, with a weight of 2.9% in the energy sector, slightly above the S & P 500. It rose by 26.7%, lagging behind the rise in S & P.

“They may not own some of the better performing energy companies that may have scored lower in terms of ESG,” he said.

Lucas Smart, Head of Sustainable Factor Strategy for BlackRock’s US iShares
BLK,

Asset managers said they believe that sustainable portfolios “can provide investors with better long-term risk-adjusted returns as society moves towards a low-carbon economy.”

“All investors have more choices about how they want to reach their investment and sustainability goals,” he added, with BlackRock’s ESGETF suite.

The iShares ETF was slightly behind the wider market, but some of BlackRock’s ESG funds outperformed S & P. This includes the $ 4.39 billion iShares MSCI USA ESG Select ETF.
Susa,

It has an energy weighting of 1.35%. $ 4 Billion iShares ESGMSCI USA Leaders ETF
SUSL,

1.16% energy weighting. And the $ 4 billion iShares MSCI KLD400 Social ETF
DSI,

Uses 0.94% energy weighting. All three returned at least 30%.

Xtrackers MSCI USA ESG Leaders Equity ETFs, among other widespread ESGETFs with energy underweights
USSG,

The $ 3.8 billion fund increased its energy exposure by 31.8% in 2021 with only 1.2%.

Vanguard ESG US Equity ETF
ESGV,

AUM’s second-largest ESGETF is $ 4 billion, with only 0.25% invested in the energy sector. It rose 26.6% in 2021 and was slightly below S & P, but is closely tracking its benchmark, the FTSE US All Cap Choice Index (composed of 1,500 stocks).

Change Finance US Large Fossil Fuel Free ETF
CHGX,

The only energy exposure comes from solar panel maker Sunrun, a $ 117.5 million fund
Run,

It increased by 28.4%. Nuveen ESG Large Cap Growth ETF
NULG,

The $ 913 million fund with only 0.4% energy increased by 28.2%.

“Just because the energy is so small, it highlights how we were able to do it in terms of not using fossil fuels,” Rosen Bruce said.

How the broad-based ESGETF was built up in 2021

name

Ticker

Return in 2021

AUM, billions of dollars

iShares ESG Aware MSCI USA

ESGU

26.70%

$ 25.70

Vanguard ESG US Equity ETF

ESGV

26.60%

6.4

iShares MSCI USA ESG Select ETF

Susa

30.50%

4.8

iShares ESGM SCIUSA Leaders ETF

SUSL

31.50%

4.3

iShares MSCI KLD400 Social ETF

DSI

31.30%

4.2 4.2

Xtrackers MSCI USA ESG Leaders Equity ETF

USSG

31.80%

3.8 3.8

Xtrackers S & P 500 ESG ETF

SNPE

31.40%

0.9.

Nuveen ESG Large Cap Growth ETF

NULG

28.20%

0.9.

iShares ESG Advanced MSCI USA ETF

USXF

27.10%

0.6 0.6

IQ Candriam ESG US Equity ETF

IQSU

30.50%

0.5

SPDR S & P 500 ESF ETF

EFIC

31.30%

0.5

Change Finance US Large Fossil Fuel Free ETF

CHGX

28.40%

0.1

S & P 500

spy

28.70%

Source: CFRA Research, MarketWatch

Stock selection

Rosen Bruce says stock selection is why some of ESGETF work so well. The top holdings of iShares and Vanguard ETFs are as weighted as the holdings of S & P, but Nuveen and Xtrackers ETFs overestimated Microsoft, Tesla and Nvidia, but had no exposure to Amazon and Apple. .. Change Finance underestimates the name of top technology, suggesting that other equity holdings have affected performance.

Fund

Exposure to Megacap shares (% of assets) *

Apple

Microsoft

Amazon

Tesla

Nvidia

iShares ESG Aware MSCI USA

6.6

5.6

3.5 3.5

2.2

1.8 1.8

Vanguard ESG US Equity ETF

6.8

6.1.

3.6

2.1 2.1

1.7 1.7

Xtrackers MSCI USA ESG Leaders Equity ETF

10.7

4.24

3.3 3.3

Nuveen ESG Large Cap Growth ETF

11.5

3.9

3.8 3.8

Change Finance US Large Fossil Fuel Free ETF

1.04

0.95

0.85

iShares MSCI USA ESG Select ETF

5.6

4.59

2.1 2.1

2.5

iShares ESGM SCIUSA Leaders ETF

10.4

4.2 4.2

3.2 3.2

iShares MSCI KLD400 Social ETF

9.9

Four

3

S & P 500

6.8

5.9

3.6

2.2

1.7 1.7

* As of January 13, 2022

He said this is a reminder that investors not only see the fund’s largest 10 holdings, but also confirm all ETF holdings. People usually buy ESG ETFs for “doing good” reasons, but there may be fundamental benefits to companies that include or exclude them.

“All stocks included or not included in ESGETFs are more important than the fund’s cost ratio and assets under management, as well as the top 10 positions, but many claim to be such an indicator. I think I would choose an ETF based on that, “he said.

He states that all of these ESGETFs are passive index funds that follow preset rebalancing rules. That is, heavier weights on a particular high flyer are not a sign of goose returns. ESG Index ETF companies are commonly selected because they get high scores in terms of ESG rather than valuation or momentum characteristics.

“They were fortunate in that the stocks they favorably or overweighted happened to be some of the high-flying stocks,” he said.

Debbie Carlson is a MarketWatch columnist. Follow her on Twitter @ DebbieCarlson1..

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S & P’s energy sector surged more than 50% last year, but how could Green Fund catch up with the stock market?

http://www.marketwatch.com/news/story.asp?guid=%7B20C05575-04D4-B545-7874-4A0B48E8E7BC%7D&siteid=rss&rss=1 S & P’s energy sector surged more than 50% last year, but how could Green Fund catch up with the stock market?

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