Every so often, a Wall Street offering turns from a much-loved darling to a much-despised item. Stock ETFs with an environmental, social and governance (ESG) slant are currently suffering from that problem.
In 2023 alone, 36 ESG-labeled funds were shuttered, which was double the number of the previous year, according to data from Bloomberg Intelligence. Active funds haven’t been spared, despite the rapid influx of actively managed ETFs elsewhere. The bulk of the ESG funds liquidated last year, 60% to be precise, were active funds.
That’s part of a broader problem. Nearly half of the 100 large U.S. companies surveyed by the Conference Board think tank said that they’ve already experienced ESG backlash, according to results published in September 2023. Sixty-one percent of the companies expect this to continue or intensify in the next two years.
It’s impossible to know how far the pushback on ESG investing will go. But it’s also good to keep in mind the words of investing great Sir John Templeton, who once quipped, “The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”
So it might be time to look more closely at a few interesting ETFs with ESG leanings.
Columbia U.S. ESG Equity Income (ESGS)
This fund is more than just a pure growth play; it looks for companies with ESG credentials that have financial stability and the wherewithal to support future dividend payments.
The fund is linked to MSCI’s Beta Advantage U.S. ESG index, which screens for companies with a favorable ESG score, and then Columbia Threadneedle's proprietary ESG ratings are used with the index.
The Columbia fund charges just 0.35% annually. It has delivered strong results over the past three years, gaining 42.81%, not including dividends, while the S&P 500 gained only 33% in that time.
Still, the Columbia fund has recently underperformed against ESG peers and the S&P 500, a problem largely due to its conservative, dividend income focus, which has been out of favor.
Hennessy Stance ESG ETF (STNC)
Launched in 2021, the Hennessy Stance fund has a shorter performance history than most of its ESG peers. Nevertheless, it offers a fresh approach to the space by combining active management with metrics built by machine learning and artificial intelligence, aiming to reduce tail risk and downside losses when markets get choppy. Using these models, the Hennessy fund picks companies that score well on ESG metrics and have the potential to outperform.
With around $65 million in assets, the fund's portfolio is concentrated in roughly 35 stocks with an average market size of $44.8 billion. Its largest industry exposures are to information technology (which accounts for 24.2% of the portfolio), healthcare (accounting for 24.2%) and industrials (representing 18.7%). The fund's annual expense ratio is 0.85%.
Invesco Water Resources ETF (PHO)
No global resource is more important or needed to sustain life than water. And this Invesco fund offers a rather straightforward way to invest in that theme.
The fund’s $1.9 billion in assets is spread across 41 stocks that make up the Nasdaq OMX US Water Index. Around 98% of the companies are based in the U.S., while the rest are international names.
A look into the Invesco fund’s historical performance numbers finds that it sometimes bests the S&P 500 by a healthy margin, while other times it has lagged. For example, the fund gained only 152% during the past 10 years while the S&P 500 gained 227%. But over seven years, Invesco wins, having beaten the S&P 500 with a 151% increase over the index’s 140%.
Key Takeaways
While the ESG category has taken its lumps, winners will emerge.
The ETFs that focus their investments on solid businesses with profits that do good for society can turn ESG backlash into an advantage—and thereby drive long-term results for investors.
Ron DeLegge II is the founder of ETFguide.com and author of several books, including "Habits of the Investing Greats" and "Portfolio Architecture: A Handbook for Investors."