The Long Game

Impact investing is waiting its turn as interest in it grows.

Reviewed by: Dave Nadig
Edited by: Dave Nadig

[This article appears in our March 2019 issue of ETF Report.]

While 2018 was a great year for environmental, social and governance (ESG) ETFs, you could be forgiven for not noticing.

Flows into ESG ETFs can best be described as a “slow trickle.” And I think that’s a good thing. Investors who use ESG factors in their portfolios are generally not hot-money day-traders looking for the hip new thing. They are, almost by definition, thoughtful buy-and-hold investors.

So why do I think it’s been a great year for socially responsible ETFs? Because the product lines have matured so well.

Consider the launch of the Goldman Sachs JUST U.S. Large Cap Equity ETF (JUST). Launched last June, it’s already sitting on $200 million in assets with more than $500K  trading on an average day. That’s a strong launch for the 20 bps fund.

A Certain Seriousness
But even more interesting is the methodology, which leans on JUST Capital’s surveys of actual investors to determine what ESG even means in a given year. Backed by billionaire investing legend Paul Tudor Jones, the fund brought a certain seriousness to the ESG space.

Or consider Vanguard’s entrance into the space, led by the Vanguard ESG U.S. Stock ETF (ESGV), which, only five months old, has attracted $150 million and trades $2.5 million a day.  Or Nuveen’s “full suite” approach to the ESG portfolio conundrum, with funds ranging from emerging markets to bonds.

In short: Almost anywhere you look for your core investment exposure, the ETF industry has developed ESG-focused solutions.

The focus on ESG has also brought out some big-gun skeptics. I was on CNBC in January with noted investor Kevin O’Leary, who threatened to bring a guitar to Inside ETFs in Florida so he could sing Kumbaya during the socially responsible investing panels. He joins a raft of seasoned professionals who think ESG can only succeed if it outperforms.

No Trick Question
But I think there’s a missing piece to that argument. After all, why do stocks go up? It’s not a trick question—stocks go up because more people want to buy them than sell them. As screening for ESG becomes more and more commonplace, and more and more investors—whether they’re millennials inheriting wealth, or institutions—add socially responsible strategies to their preferences, the implication is that more buyers are in the market for the “best” ESG stocks, and thus, they’ll appreciate in price.

This kind of reflexivity—where assets drive performance, which in turn drive more assets—is what I believe will ultimately drive us up the hockey stick of asset growth.

According to the US SIF Foundation, in the U.S. alone, there’s now $12 trillion in ESG-focused assets, a 38% increase in just two years. All of those assets are buyers of the ESG Elite, and that should drive performance over the longer term. So when someone asks me where the outperformance of ESG is, my answer is, “just you wait.”

Prior to becoming chief investment officer and director of research at ETF Trends, Dave Nadig was managing director of Previously, he was director of ETFs at FactSet Research Systems. Before that, as managing director at BGI, Nadig helped design some of the first ETFs. As co-founder of Cerulli Associates, he conducted some of the earliest research on fee-only financial advisors and the rise of indexing.