Market Pulse: ESG funds, look before you leap
Special to the Tribune
In February 2020, and again in June 2020, I published articles on how “ESG” funds were good for marketing, but little else. I wrote, “Frankly, it’s hard to see why the funds are considered green or socially responsible.”
Apparently, the SEC agrees. They recently stated that several asset managers were misleading investors by marketing funds as ESG friendly but not making consistent investment decisions.
ESG stands for Environmental (carbon emissions), Social (racial and gender diversity), and Governance (executive compensation). Investors have awakened these last few years to climate change and social issues and want their investment dollars to go to good “sustainable” firms. Inflows into ESG funds in 2020 were more than double the previous year and 10 times those of 2018. There is a demand for socially responsible investments.
The asset management industry has responded by launching their own socially responsible funds. The number of ESG funds is 30% higher than in 2019. But in my 2020 articles I noted that many of these ESG funds “look more like a technology ETF with a few other stocks sprinkled in.”
Just a few weeks ago Forbes Advisor posted an article titled, “The Best ESG Funds Of 2021.” It lists Vanguard FTSE Social Index Fund (VFTAX) as one of the best. The top holdings are Apple, Microsoft, Alphabet, Amazon, and Facebook. Really? Isn’t that just a “FANG” fund? They claim it is ESG because it doesn’t own alcohol, gambling, or fossil fuel companies.
I still stand by my recommendation to look past ESG funds, and environmentally responsible investors should instead choose green sector funds. For example, the Invesco Solar ETF (TAN) holds SolarEdge Technologies, Enphase Energy, First Solar, Xinyi Solar Holdings, etc. Those companies sound appropriate. The holdings in the First Trust Global Wind ETF (FAN) are Vestas Wind Systems, Siemens Gamesa Renewable Energy, Northland Power, etc. Finally, the holdings match the concept of the fund.
Another ETF whose holdings actually reflect the fund’s name is First Trust Nasdaq Clean Edge Green Energy ETF (QCLN). Tesla (TSLA) is its top holding. For those that simply don’t want to own energy stocks then consider ProShares S&P 500 Ex-Energy ETF (SPXE).
Buying an ESG fund might feel good but know what you are buying. Many of these socially conscious funds look more like a technology fund rather than a green renewable fund or socially responsible one. Before buying, look at the fund’s largest stock holdings to see if they reflect your values. After doing so, you might even decide to buy some of the stocks instead of the fund.
David Vomund is an Incline Village-based Independent Investment Adviser. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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