ESG ETFs were supposed to help stave off the end of the world with responsible investments. But these funds are now on life support themselves.
ESG, or environmental, social and governance, used to be a selling point for ETFs. But now the point is a liability — as the election hints such factors aren't a top concern for most Americans. There's also the suspicion the new administration will roll back some regulations that urge ESG principles.
A number of ESG funds already closed this year including Flexshares ESG and Climate, X-Trackers J.P. Morgan ESG and WisdomTree US ESG, says ETF.com. And WisdomTree closed an additional two ESG funds after being fined last month by the Securities and Exchange Commission for allegedly misrepresenting the environmental merits of the funds.
ESG Turns Into A Bad Word In S&P 500
Meanwhile "ESG" is so akin to financial kryptonite that some ETFs are purging the letters from their names.
Instances of asset managers removing the acronym ESG or the word "sustainable" from surviving ETFs abound. Examples include Thrivent Small-Mid Cap ESG, whose manager said this month the fund is becoming Thrivent Small-Mid Cap Equity.
And American Century Sustainable Equity ETF is dropping "sustainable" to simply become Large Cap Equity ETF. American Century is even ditching ESG in the fund's ticker symbol. The Fund will now trade by the symbol ACLC.
Not all the ESG backlash is political. Part of it is due to a clampdown by regulators worried the names of some ETFs are misleading, says Todd Rosenbluth, head of research at TMX Vetta Fi.
"I believe this (dropping ESG from fund names) is more the result of the SEC's name change rule than asset managers pulling back their focus," Rosenbluth said.
ESG ETFs' Performance Isn't That Bad
The tide has turned on ESG ETFs' marketability, but their performance isn't horrible.
A basket of six popular ESG ETFs, including funds from Vanguard and BlackRock, are up an average 23.1% this year, according to data from ETF.com and S&P Global Market Intelligence. That's not far behind the S&P 500's 24% gain this year.
But ironically, much of the performance driving ESG ETFs is power-gobbling AI. The largest position in one of the most popular ESG ETFs is AI giant Nvidia. Nvidia accounts for 7.1% of the $13.9 billion-in-assets iShares ESG Aware MSCI USA ETF. Apple, a master of planned obsolescence also accused of being a monopoly by the Department of Justice, is No. 2 with a 6.3% weight in the portfolio.
Don't Turn The Lights Out On ESG ETFs Just Yet
But amazingly, money hasn't poured out of ESG ETFs following the election, says Rosenbluth.
"While many of the policies in focus for ESG ETFs could be negatively impacted by the Trump Administration, investors in these funds have stayed relatively loyal in November," he said.
There are some individual investors who prioritize climate initiatives and corporate diversity, Rosenbluth said. They "will continue to do so even if the government does not," he said.
But at the same time, don't expect large institutional investors to eagerly "lean in" to ESG, especially in the months leading into a new Republican administration, Rosenbluth says.
Performance Of Select ESG ETFs Vs. S&P 500
| ETF | Assets ($ billions) | Expense ratio | YTD % ch. | |
|---|---|---|---|---|
| iShares ESG Aware MSCI USA | ESGU | $13.9 | 0.15% | 23.2% |
| Vanguard ESG U.S. Stock | ESGV | $9.9 | 0.09% | 22.9% |
| iShares MSCI KLD 400 Social | DSI | $4.9 | 0.25% | 23.9% |
| iShares MSCI USA ESG Select | SUSA | $3.7 | 0.25% | 22.0% |
| BlackRock U.S. Carbon Transition Readiness | LCTU | $1.3 | 0.14% | 22.6% |
| iShares ESG MSCI USA Leaders | SUSL | $1.0 | 0.10% | 23.9% |
| SPDR S&P 500 ETF Trust | SPY | 24.0% |
