Market Pulse: Research ESG funds before investing
On June 7, CNBC ran a story saying that sustainable investing was set to surge in the wake of the coronavirus pandemic. Sustainable funds are often labeled “ESG Funds,” which stands for Environmental, Social, and Governance. ESG funds attracted record inflows in the first quarter amid the market turmoil.
But do those funds invest only in companies that are good for the environment and socially responsible? No.
The CNBC article mentioned Nuveen ESG Large-Cap Growth ETF (NULG) and iShares ESG MSCI USA ETF (ESGU) as popular ESG funds. NULG’s top holdings are Google, Mastercard, Nvidia, Adobe, and Paypal. ESGU’s top holdings are Apple, Microsoft, Amazon, Facebook, and Google.
Am I wrong or do those sound like large-cap technology funds? Frankly, it’s hard to see why the funds are even considered green or socially responsible.
I find it interesting that Tesla does not appear as a top-five holding in either fund. Given the stock’s strength (up 175% since the March low), even a modest initial holding could have become a top-10 holding.
Investing with a conscience is admirable, but buying most ESG funds isn’t rewarding socially responsible behavior or even green companies. Instead, I suggest environmentally responsible investors should choose green sector funds instead.
For example, the Invesco Solar ETF (TAN) holds SolarEdge Technologies, First Solar, Enphase Energy, Xinyi Solar, etc. Those companies sound appropriate. The holdings in the First Trust Global Wind ETF (FAN) are Orsted A/S, Northland Power, Vestas Wind Systems, Siemens Gamesa Renewable Energy, 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).
With today’s focus on racial equality, socially conscience investors can consider the Impact Shares NAACP Minority Empowerment ETF (NACP). Unfortunately, its largest holdings resemble a FANG ETF and Merck, one of the few large companies with an African-American CEO, isn’t even a top holding.
Buying an ESG fund might feel good, but beware. Many of these socially conscious funds look more like a technology fund than a green renewable fund. 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 Advisor. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Consult your financial advisor before purchasing any security.
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