Institutions Don't Want Thematic ESG
Notably, the five ESG ETFs bringing in the most money year-to-date aren't narrow, thematic funds. In fact, some of the higher-profile thematic funds that have launched in recent years actually have lost assets so far in 2019, including the SPDR SSGA Gender Diversity Index ETF (SHE), which has lost a net $100 million. Meanwhile, UBS's InsightShares LGBT Employment Equality ETF (PRID) and the InsightShares Patriotic Employers ETF (HONR) have lost over 90% of their assets, dropping $23 million and $24 million, respectively.
Instead, the five most successful ESG ETFs all promise to replicate the performance of some broad-based market benchmark, just without any of the sin stocks or other objectionable holdings. That makes these ETFs ideal for replacing some or all of the vanilla ETFs held in a traditional asset allocation strategy, while only realizing a slight bump in overall portfolio cost.
For example, USSG costs just 0.10%, whereas the cheapest U.S. large cap ETFs, the Schwab U.S. Large-Cap ETF (SCHX) and the SPDR Portfolio Large Cap ETF (SPLG), cost 0.03%. That's an annual difference of just $7 per every $10,000 invested.
Essentially, the ESG ETFs that are gaining assets are the ones that offer market performance that's easy on the conscience, while keeping overall costs extremely low—which is exactly what's needed by institutions seeking to satisfy both fiduciary responsibility and ESG investment mandates.
Therefore, as prices on ESG ETFs continue to come down, we'll likely see even more institutional money enter the space—and where institutions go, retail usually follows.
History Repeats Itself
That said, it's worth keeping these big one-day inflows in perspective, because institutional money has flowed into ESG ETFs before—with very little lasting impact.
In 2014, the SPDR MSCI ACWI Low Carbon Target ETF (LOWC) and the iShares MSCI ACWI Low Carbon Target ETF (CRBN) were each seeded with cash from the United Nations Joint Staff Pension Fund, which serves 205,000 current and former UN employees, while CRBN received seed money from the University System of Maryland Foundation. In total, CRBN was seeded with $142 million, while LOWC received $22 million.
Then in 2016, SHE launched with a significant amount of seed capital from CalSTRS, to the tune of $250 million (read: "It's All About ETF Seed Money") .
Finally, last year, the Goldman Sachs JUST U.S. Large Cap Equity ETF (JUST) made a big splash when it took in $250 million in inflows in its first day, likely from “bring your own assets” money from Goldman Sachs itself (read: "'JUST' Takes In $250M Its First Day").
With the exception of CRBN, whose AUM has risen to $413 million, none of these ETFs has pulled in meaningful net inflows since their big debuts. In fact, most have lost assets since their initial influx: SHE is now down to $250 million, down from roughly $330 million this time last year. Meanwhile, JUST is now down to $213 million.
Even CRBN, which remains well funded, has lost $112 million in outflows year-to-date.
Start Of An Avalanche?
So while USSG's massive influx was interesting, it's difficult to draw many conclusions from a single day's—or month's—worth of blockbuster inflows. If the inflows continue, perhaps we can start discussing in earnest whether ESG has finally "hit it big."
In our opinion, what's more interesting are the steady, quiet and regular inflows into funds like ESGD. Flows like these are like a snowball rolling downhill: barely noticeable, perhaps, until the snowball becomes an avalanche.
Contact Lara Crigger at [email protected]