Some have pushed back, saying that “surprising exclusions” are nothing new and exist in other areas such as smart-beta and theme ETFs. This is true, but there is one crucial difference: Those ETFs aren’t generally seeking to replace an investor’s entire equity portion of the portfolio. Because if the goal is to “sleep at night,” then what’s the point of putting a small allocation into an ESG ETF while still investing in other funds, like the Vanguard 500 Index Fund, which hold those “bad” companies you don’t want?
For those who are interested in ESG and don’t mind missing out on the next Amazon, the next part of my test is to ask whether they are willing to curb their consumption of the goods and services provided by those excluded companies. For example, are you going to continue to shop at Amazon, drive an SUV or take airplanes 10 times a year? If so, then what’s the point of not owning those stocks? You are just going to rob yourself of profits you helped create.
I did an informal poll on this, too, and found only a fifth of those who were willing to miss out on Amazon were also willing to not shop there. Now, I’m not saying you need to live in the woods and eat bugs to be pure enough to be an ESG investor, but you should probably be willing to make some inconvenient choices as a consumer — because, let’s be honest, that’s where investors can truly make a company pay attention. Otherwise, a lot of this is demand trying to demonize supply to soothe its guilt and feel good inside.
At the end of my little screening system here we are left with 5% of the investing world that I’d argue has the stomach and commitment to be messing around with ESG ETFs. The rest either just don’t want ESG or are slacktivists — people who want to feel as if they are doing something but are unwilling to make any inconvenient sacrifices such as lagging the market or curbing parts of their lifestyles. These investors should probably just stick with owning the broad market.
And while 5% may seem like a small amount, it would actually be a pretty solid base of investors for these ETFs. To convert that into dollars, 5% of ETF assets would equate to $200 billion, a respectable category. Currently, ESG ETFs have only about one-tenth of that amount. And yet there are about 100 products on the market. That’s $200 million per ETF, which is five to 10 times below the average of many other popular areas. Supply has so far outpaced the hype and demand in a way that’s never been seen in the ETF market.
And it doesn’t look as if product proliferation will be slowing anytime soon. BlackRock’s Larry Fink recently announced a doubling of the company’s ESG ETF lineup, which means due diligence will be that much more cumbersome.
And while this may come off as a bit of a downer to all the excitement around ESG, that’s not my intention. I’m not anti-ESG at all, but I am anti-nasty surprise.
I just want to help make sure investors wake up with peace of mind, too.
This article was provided by Bloomberg News.