ESG ETFs Of All Shapes & Sizes

Key Takeaways

• What is inside funds like the iShares ESG Aware MSCI USA ETF (ESGU) is different than newer entrants like the iShares ESG Screened S&P 500 ETF (XVV) and TrueShares ESG Active Opportunities ETF (ECOZ).
• Some of the 17 clean energy ETFs, such as the Invesco Solar ETF (TAN) and ALPS Clean Energy ETF (ACES), have shined in the past year, but are also positioned to outperform, according to our analysis.
• Meanwhile, our corporate governance ETF subcategory includes leadership-focused funds, such as the SPDR SSGA Gender Diversity ETF (SHE) and ownership-focused funds such as the WisdomTree Emerging Markets Ex-State-Owned Enterprises Fund (XSOE).

CFRA rates 112 environmental, social and governance (ESG) ETFs with more than $50 billion in assets, but few are the same. We classify ESG ETFs into one of seven subcategories based on the fund’s focus. The largest subcategory is broad ESG ETFs, which are ETFs that hold companies that meet specific ESG characteristics as determined by the ETF issuer or its index provider. ETFs are classified as broad ESG if the screening criteria spans all three ESG pillars.

ESGU is the largest of the 70 broad ESG ETFs, with $11 billion in assets, but the subcategory also includes the $7 million and actively managed ECOZ, which holds fewer positions than index-based ESGU and incorporated traditional fundamental and valuation metrics such as return on capital and intrinsic value. ECOZ holds less Apple (AAPL) and Microsoft (MSFT) than ESGU, and has Enphase Energy (ENPH) and Square (SQ) as its two largest positions.

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

The six other subcategories include clean energy, corporate governance and faith-based ETFs.

Breaking Down the ESG ETFs into Objectives

Source: First Bridge ETF Database, as of Oct. 31, 2020

ECOZ is not the only broad ESG to launch in 2020, including XVV and the Vanguard ESG U.S. Corporate Bond ETF (VCEB), both of which came to market in September.

Clean energy ETFs have climbed the highest in 2020. Though ESGU has outperformed the SPDR S&P 500 ETF Trust (SPY) year-to-date through Nov. 6, rising 14% compared to 10%, respectively, many clean energy ETFs have been significantly stronger. CFRA classifies clean energy ETFs as funds holding companies in clean energy businesses such as renewable energy, clean energy technology and energy conservation. These ETFs are distinguished between low carbon footprint funds that hold companies that have a relatively low-carbon emission or a relatively small carbon footprint, as determined by the ETF issuer or its index provider.

TAN and ACES, which were up 145% and 84%, respectively, in 2020 are two examples of the 17 clean energy ETFs. ACES holds some solar companies, but also provides exposure to other renewable energy sources, including wind power and hydroelectricity, and clean technologies such as electric vehicles. For example, Tesla (TSLA) is among the recent top 10 holdings.

There are 10 corporate governance ETFs, but there is disparity among them. For example, the Impact Shares YWCA Women’s Empowerment ETF (WOMN) and SPDR SSGA Gender Diversity Index ETF (SHE) both hold stakes in companies that focus on gender diversity/equality. While SHE has more assets—$142 million compared to WOMN’s $10 million—the smaller fund has performed best. In the one-year period ended Nov. 6, WOMN’s 29% return was triple the 8.5% for SHE. WOMN launched in August 2018 and does not have the three-year record SHE provides.

Meanwhile, the WisdomTree Emerging Markets ex-State-Owned Enterprises Fund (XSOE) is constructed based on the premise that government ownership may influence corporate decisions that are not necessarily in the best interest of investors. In the three-year period ended Nov. 6, XSOE rose 7.5% on an annualized basis, double the gain for the iShares MSCI Emerging Markets ETF (EEM).

Conclusion

CFRA expects the supply of ESG ETFs to climb in 2021, in response to the strong demand in 2020 and the likelihood a Biden administration plans to make fighting climate change a priority. As the ETF universe becomes more crowded, we think investors will want to dig into certain ESG subcategories to understand their range of choices.

All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of the analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. For more information and disclosures, please refer to CFRA's Legal Notice at https://www.cfraresearch.com/legal/.

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