Environmental, social and governance (“ESG”) investing has remained a hot favorite among investors since the pre-coronavirus outbreak. About than 62% respondents to the survey indicated that the social domain of the Environmental, Social and Governance (ESG) corner is attracting more attention since the start of the COVID-19 pandemic (read: ESG ETFs Appear Unscathed by the Coronavirus Carnage).
ESG investments now make up about one-third of the total U.S. AUM.The S&P 500 ETF SPY, the Russell 2000-based ETF IWM and the Nasdaq-100-based ETF QQQ have gained about 10.9%, 7% and 36.5%, respectively, this year. However, several ESG ETFs outperformed the S&P 500 and some have even returned close to Nasdaq — the hottest trade of this year.
Nuveen ESG Mid-Cap Growth ETFNUMG (up 33.9% this year) is a classic example. SPDR S&P Kensho Clean Power ETF CNRG is up 86% while Vanguard ESG U.S. Stock ETF ESGV has added 17%. Let’s have a look at how this became possible.
Inside the Outperformance Amid COVID-19
Technology and healthcare appear to be two of the best-positioned sectors amid the coronavirus outbreak. While this medical emergency bolstered the need for treatments and vaccines, prolonged lockdowns globally made technology a crucial thing for operations in most cases.Since most ESG ETFs are tech-heavy, the rally behind the socially responsible funds are self-explanatory.
Also, amid COVID-19, there has been a surge in interest in investing in companies that have smartly deployed their capital to confront climate change, “raise standards of corporate governance and improve human rights,” per a source called moneyobserver.com.
Will ESG Investing Lose Luster in the Post-Pandemic World?
Though virus cases are rising globally, vaccine hopes also strengthened this month. Both Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA) indicated that their vaccines proved about 95% effective in preventing COVID-19 in clinical trials. AstraZeneca’s vaccine showed encouraging immune response in older adults.
So, the hot trades of the peak pandemic, i.e. technology, may waver in the coming days as beaten-down zones will likely take center stage now. Investors should note that small-cap stocks and economically sensitive sectors that offer value currently have outperformed this month.
“Most ESG ETFs are concentrated in mega-cap companies and provide limited exposure to the small-cap companies," says Todd Rosenbluth, head of mutual fund and ETF research at CFRA, as quoted on investors.com.
However, while this may make some investors believe ESG ETFs may underperform in the post-pandemic world due to its over-exposure to tech, in reality, that shouldn’t be the case.
Why ESG ETFs Do Not Have to Worry Over Long Term
The largest ESG investing ETF has about 25% weighting to S&P 500 technology stocks. That's close to the S&P 500 Index, as indicated by pundits and quoted on investors.com. So, one can expect ESG portfolio’s return in line with the S&P 500 Index at least.
However, some ETFs like CNRG (where Electrical Components & Equipment take about 24% of the fund while semiconductor-related products occupy another 24%) or Invesco Solar ETF TAN (more than 60% is tech-driven) do have considerable focus on technology. But that should not act as a long-term hurdle.
In any case, the long-term outlook for the tech-driven growth stocks is rosy as the pandemic pointed to the pressing need for technology in every aspect of our lives. Joe Biden’s apparent victory over President Donald Trump in the U.S. election also calls for sunnier days ahead for ESG investing.
In a nutshell, value ETFs may register a short-term bounce, but growth (specially technology) stocks will prevail in the medium term, given the ultra-low interest rate environment globally (read: Value Or Growth: Which ETFs To Play Ahead?).
Till then, investors can focus on small-cap ESG ETFs like Nuveen ESG Small-Cap ETF NUSC and iShares ESG Aware MSCI USA Small-Cap ETF ESML to get the best of the both worlds at the current level – small caps plus ESG. Both funds are not extremely heavy on technology.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
SPDR S&P 500 ETF (SPY): ETF Research Reports
Invesco QQQ (QQQ): ETF Research Reports
iShares Russell 2000 ETF (IWM): ETF Research Reports
Invesco Solar ETF (TAN): ETF Research Reports
Nuveen ESG MidCap Growth ETF (NUMG): ETF Research Reports
Nuveen ESG SmallCap ETF (NUSC): ETF Research Reports
Vanguard ESG U.S. Stock ETF (ESGV): ETF Research Reports
iShares ESG Aware MSCI USA SmallCap ETF (ESML): ETF Research Reports
SPDR S&P Kensho Clean Power ETF (CNRG): ETF Research Reports
To read this article on Zacks.com click here.
Zacks Investment Research
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report