S&P’s energy sector is up more than 50% last year – how have green funds kept pace with the stock market?

S&P’s energy sector is up more than 50% last year – how have green funds kept pace with the stock market?

Fossil-fueled energy stocks are rallying again in 2021. That could have doomed the performance of sustainable ETFs — but about half of ESG’s largest offerings did better than the S&P 500.

But as with many funds, stock selection, rather than sector bias, is the main reason, said Todd Rosenbluth, director of ETF research at CFRA.

Many ESG ETFs carry some of the biggest technology names that have also helped boost broad indexes, such as Apple AAPLAnd
Amazon AMZNAnd
TeslaAnd
Nvidia NVDA
and Microsoft MSFT.
Weights are also important; Some were overweight for some of the major names versus the broader SPX index.

The technology sector, up about 35% in 2021, is the largest segment in the S&P 500 at 29%. Meanwhile, energy is among the smallest segments of the S&P 500 at 2.7%, offsetting the impact of its 53% rally. The S&P 500 had a total return of 28.7% last year.

Rosenbluth said there is a perception that large-scale ESG ETFs will lose out amid the energy sector recovery. He knew this was a bug “since power is a small part of the broader market, it wouldn’t be detrimental to their performance.”

Many of the largest ESG ETFs are sector-neutral funds, designed to have exposure similar to any broader market exposure they track and can be alternatives to traditional underlying holdings. Energy companies can sometimes be included in ESG ETFs if they have high social or corporate governance scores.

Having power names didn’t always lead to outperformance. The best example is the iShares ESG Aware MSCI USA ETF ESGUAnd
The largest ESG ETF by assets under management at $25.7 billion, it has a 2.9% weighting of the energy sector, slightly higher than the Standard & Poor’s 500 Index. It gained 26.7%, lagging the S&P gains.

“Maybe they don’t have some of the top-performing energy companies that may have scored worse from an ESG perspective,” he said.

Lukas Smart, President of US iShares Sustainable and Factor Strategies at BlackRock BLKAnd
The asset manager said he believes sustainable portfolios “could provide better returns in the long-run with an account of risk to investors as society navigates the transition to a low-carbon economy.”

He added that the BlackRock group of ESG ETFs gives “all investors more choice in how they wish to meet their investment and sustainability goals.”

While the iShares ETF has lagged a bit behind the broader market, other funds among BlackRock’s ESG funds outperformed S&P. It includes $4.39 billion iShares MSCI USA ESG Select ETF SUSAAnd
which has an energy weight of 1.35%; iShares ESG MSCI USA Leaders ETF SUSL $4 Billion ProgramAnd
with an energy weight of 1.16%; and iShares MSCI KLD 400 Social ETF DSI worth $4 billionAnd
With a power weight of 0.94%. All three returned at least 30%.

Among the broad-based, lowest-weight ESG ETFs, Xtrackers MSCI USA ESG Leaders Equity ETF USSGAnd
$3.8 billion, has just 1.2% energy exposure, finished 2021 up 31.8%.

Vanguard ESG US Stock ETF ESGVAnd
The second largest ETF in ESG by AUM at $4 billion, investing only 0.25% in the energy sector. It rose 26.6% in 2021, lagging slightly behind the S&P index but closely tracking its benchmark, the FTSE US All Cap Choice Index, which includes 1,500 securities.

Change Finance ETF CHGX Large Capital US Free From Fossil FuelAnd
The $117.5 million fund whose only energy exposure comes from solar panel maker Sunrun RUNAnd
It rose 28.4%. Nuveen ESG Large-Cap Growth ETF NULGAnd
A $913 million fund containing just 0.4% of energy, is up 28.2%.

“It highlights how you could still have done a good job from a fossil fuel-free perspective, just because the energy is so small,” Rosenbluth said.

How Large-Scale ETFs Stacked in ESG in 2021

Noun

ribbon

Back 2021

Assets under management in billions of dollars

iShares ESG Aware MSCI USA

ESGU

26.70%

USD 25.70

Vanguard ESG US Equity Fund

ESGV

26.60%

6.4

iShares MSCI USA ESG Select ETF

sosa

30.50%

4.8

iShares ESG MSCI USA Leaders ETF

SUSL

31.50%

4.3

iShares MSCI KLD 400 Social ETF

DSI

31.30%

4.2

Xtrackers MSCI USA ESG Leaders Equity ETF

USSG

31.80%

3.8

Xtrackers S&P 500 ESG ETF

SNPE

31.40%

0.9

Nuveen ESG Large Scale Growth Fund

FIR

28.20%

0.9

iShares ESG Advanced MSCI USA ETF

USXF

27.10%

0.6

ETF IQ Candriam ESG US Equities

IQSO

30.50%

0.5

SPDR S&P 500 ESF ETF

EFIC

31.30%

0.5

Change Finance Large Venture Capital ETFs Free of Fossil Fuels in the US

CHGX

28.40%

0.1

Standard & Poor’s 500

spy

28.70%

Source: CFRA Research, MarketWatch

Stock selection

Rosenbluth says stock picking is the reason some ESG ETFs have performed so strongly. While top holdings in iShares and Vanguard ETFs are weighted similarly to holdings in S&P, Nuveen and Xtrackers ETFs weighed more than Microsoft, Tesla and Nvidia, but not Amazon and Apple. Funding the change was downplaying top tech names, suggesting that other stock holdings affected performance.

money

Exposure to large cap stocks (% of assets) *

An apple

Microsoft

Amazon

Tesla

nvidia

iShares ESG Aware MSCI USA

6.6

5.6

3.5

2.2

1.8

Vanguard ESG US Equity Fund

6.8

6.1

3.6

2.1

1.7

Xtrackers MSCI USA ESG Leaders Equity ETF

10.7

4.24

3.3

Nuveen ESG Large Scale Growth Fund

11.5

3.9

3.8

Change Finance Large Venture Capital ETFs Free of Fossil Fuels in the US

1.04

0.95

0.85

iShares MSCI USA ESG Select ETF

5.6

4.59

2.1

2.5

iShares ESG MSCI USA Leaders ETF

10.4

4.2

3.2

iShares MSCI KLD 400 Social ETF

9.9

4

3

Standard & Poor’s 500

6.8

5.9

3.6

2.2

1.7

*As of January 13, 2022

He said this is a reminder to investors not only to look at the fund’s 10 largest holdings, but to review all of the ETF’s holdings. People usually buy ESG ETFs for “doing good” reasons, but there may be primary benefits to companies that they include or exclude.

“We treat all of the stocks listed and excluded from the ESG ETF, not just the top ten, that matter more than the proportion of the fund’s expenses or assets under management, although we believe many people choose an ETF based on these metrics,” he said.

He noted that all of these ESG ETFs are passive index funds that follow pre-defined rebalancing rules. This means that the heavy weights of some higher values ​​are not a sign of the geese’s return. Companies in ESG Index ETFs are generally chosen because they score highly from an ESG perspective, not in valuation or momentum characteristics.

“They were fortunate that the stocks that they weighed favorably, or that over-weighted just happened to have some of the high-flying stocks,” he said.

Debbie Carlson is a columnist for MarketWatch. Follow her on Twitter Tweet embed.

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