Fossil-Fuel-Free Funds That Aren't
Intriguingly, although four ESG ETFs are specifically marketed on their avoidance of fossil fuel stocks, even containing the words "fossil fuel" and "free" in their fund names, only one was actually free of any fossil fuel-related companies—the Change Finance Diversified Impact U.S. Large Cap Fossil Fuel Free ETF (CHGX).
Meanwhile, the SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX) has a 5.72% weighting in 37 fossil fuel companies, including Valero Energy, Halliburton and Schlumberger, an oilfield services company.
The SPDR MSCI Emerging Markets Fossil Fuel Reserves Free ETF (EEMX) and the SPDR MSCI EAFE Fossil Fuel Reserves Free ETF (EFAX) had a 2.87% and 4.13% weighting, respectively, to fossil fuel companies.
To be fair, "fossil fuel reserves free" is not the same as "fossil fuel free." Indexes excluding companies holding reserves of oil, coal and natural gas typically end up screening out energy producers, but they may still hold oilfield services companies or utilities that still use coal- or natural-gas-fired plants.
Still, it's a semantic nuance many investors may not be aware of, and in fact, for the first six months of its life, SPYX traded under the name "SPDR S&P 500 Fossil Fuel Free ETF,” even though it held fossil-fuel-related companies. SPYX added the "Fossil Fuel Reserves Free" clarification in August 2016.
Big Oil As Big Renewables
Though at first it may seem counterintuitive, it isn't all that surprising that ETFs in the clean energy space would contain some exposure to Big Oil and Big Coal—after all, these companies have made and continue to make considerable investments into green technology.
Oil producers like Chevron, Royal Dutch Shell and BP have invested billions into corn-based ethanol biofuels and hydrogen fuel cells. Utilities like NextEra Energy are transitioning from coal- and natural-gas-fired plants to solar and wind to constrain costs. Oil giant Exxon Mobil even makes lubricants for wind turbines.
Meanwhile, pure-play renewable energy companies are rare. Those that do exist tend to be small-caps, falling outside the scope of many broad-based ESG ETFs, which are large-cap funds specifically designed to provide marketlike exposure.
Some investors are excited by how conventional energy firms have been tiptoeing into clean energy. Others still want nothing to do with Big Oil and Big Coal. That's why it's so important to set aside the marketing-speak and open up the hood of your ESG ETF to see what's inside and how it came to be there. Otherwise, you might find yourself holding something you least expect.
Contact Lara Crigger at [email protected]