This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article is by Clayton Fresk, CFA, portfolio management analyst at Georgia-based Stadion Money Management.
By now, it should be clear to anyone following ETFs that a new craze is perhaps inevitable. It’s been a continual cycle for ETF issuers. So what will be the next craze to hit the ETF landscape? And how can we get in on the ground floor, or how can we differentiate our offering from others?
By way of background, right now, we seem to be in the midst of a few powerful waves of new issues. They are:
- "Smart beta," with an ever-growing number of ETFs slicing and dicing the investment universe with different methodologies in ways that are proving to be popular amongst ETF investors.
- Another wave is the increasingly discussed hedged ETFs, whether it’s the currency-hedged form that has become more popular with recent dollar strength, or the interest-rate-hedged variety that stands ready to take advantage of any possible rise in interest rates.
Both of these trends have their roots in the institutional landscape.
Institutional managers have long used smart beta—in particular, factor investing and currency hedging in their various mandates. Given that trends in ETF issuance ideas often stem from the institutional space, what could be the next wave to hit ETF-land?
I submit that the answer could be environmental, social and governance-focused (ESG) investing.
Why ESG, And Why Now?
To be clear, ESG investing is neither a new phenomenon nor a small consideration. A report from the Forum for Sustainable and Responsible Investment show that assets managed with ESG—including socially responsible investing (SRI)—guidelines grew from $3.74 trillion in 2012 to $6.57 trillion by 2014.
The top four reasons, according to the report, for offering ESG investment options were:
- Client demand
- Mission fulfillment
- Improving returns
- Managing risk
However, as of yet, this growth has not carried over into ETF-land. Currently there are 10 ETFs with SRI/ESG mandates, with aggregate assets under management of only $1.27 billion. They’re displayed in the table below.
|DSI||iShares MSCI KLD 400 Social||442.32|
|KLD||iShares MSCI USA ESG Select Social||338.79|
|CRBN||iShares MSCI ACWI Low Carbon||164.92|
|LOWC||SPDR MSCI ACWI Low Carbon||92.53|
|ICLN||iShares Global Clean Energy||85.65|
|PZD||PowerShares CleanTech Portfolio||77.50|
|RODI||Barclays Return on Disability||30.45|
|WIL||Barclays Women in Leadership||29.17|
|EQLT||Workplace Equality Portfolio||8.63|
|FIA||Falah Russell-Ideal Ratings US Large Cap||1.31|
It should be noted that the United Nations Joint Staff Pension Fund seeded both the iShares MSCI ACWI Low Carbon Target ETF (CRBN | D-94) and the SPDR MSCI ACWI Low Carbon Target ETF (LOWC | D-95).