Social responsibility may be the best thing for the planet's future. But it's not working out for your portfolio this year .
Six out of the 10 largest ESG exchange traded funds — including iShares ESG Aware MSCI USA, Vanguard ESG U.S. Stock and Xtrackers MSCI USA ESG Leaders Equity — are lagging the S&P 500 this year, says an Investor's Business Daily analysis of data from S&P Global Market Intelligence, ETF.com and MarketSmith.
The largest ESG ETF, the $21.7 billion in assets iShares ESG Aware MSCI USA, is down 17.7% this year vs. a 16.0% drop by the SPDR S&P 500 ETF Trust.
Underperformance in ESG stocks comes just as scrutiny hits the theme that's drawn billions of investors' dollars. The Securities and Exchange Commission plans to boost disclosure requirements for ESG funds, says the Wall Street Journal. And that comes after Tesla founder Elon Musk blasted ESG investing, calling it "a scam weaponized by phony social justice warriors." Musk's criticism came after the S&P 500 ESG index dropped Tesla.
"Let's all agree to do some homework ... look inside any ESG ETF we own or are considering owning," said Todd Rosenbluth, director of research at VettaFi.
ESG's Sagging Fortunes
The theme's lagging returns fly in the face of the reason many investors bought in. Companies doing right by the earth were supposed to generate solid returns. And for years they did, thanks to large holdings in tech stocks.
But now, ironically, ESG is underperforming as many "dirty" sectors like S&P 500 energy are rallying and tech is falling. The Energy Select Sector SPDR Fund is up 54.8% this year.
Meanwhile, sinking big technology stocks, usually overweight in many ESG funds, are now hurting the performance of ESG funds. The more tilted an ESG fund is toward big tech and away from energy, the worse it's doing.
The Vanguard ESG U.S. Stock ETF holds just 0.03% of its portfolio in energy stocks, says Morningstar Direct. That's less than the 3.4% weighting in the large blend category. Meanwhile, its tech stock weighting is nearly 29%, topping the 24% weighting in the category. As a result, the ETF's shares are down nearly 20% this year, making it the worst-performing large ESG fund.
What Is An ESG ETF Anyway?
The question of performance boils down to the wide variation of what's considered an ESG company. It's not a simple measurement all index providers can follow, like market capitalization.
That creates some odd dynamics, Rosenbluth points out. The Xtrackers S&P 500 ESG ETF and SPDR S&P 500 ESG ETF both exclude Tesla. But iShares ESG Screened S&P 500 ETF holds it, Rosenbluth says. Another surprise for many is why the Invesco ESG Nasdaq 100 ETF doesn't own Tesla, either.
At the same time, iShares ESG Screened S&P 500 excludes tobacco and gun stocks. But Xtrackers S&P 500 ESG owns companies in controversial industries to maintain similar sector weightings to the S&P 500.
Equally confusing, iShares ESG Aware MSCI USA owns Tesla, but the iShares ESG Advanced MSCI USA ETF does not. Both ETFs own Microsoft, a popular stock in many ESG ratings, but in very different proportions. Why? IShares ESG Advanced MSCI USA doesn't own Apple, and Microsoft picks up much of the weighting.
And now, some ETFs are picking up on the ESG backlash. The Constrained Capital ESG Orphans ETF launched in mid-May. It owns a lot of stocks many ESG funds won't touch, like Exxon Mobil, Chevron and Philip Morris.
And guess what: In its short life it's already up 2.3%, outperforming the S&P 500 and all major ESG funds.
Largest ESG ETFs Are Mostly Lagging This Year
| ETF | Symbol | YTD change | Assets (in billions) |
|---|---|---|---|
| iShares ESG Aware MSCI USA | -17.7% | $21.67 | |
| iShares ESG Aware MSCI EAFE | -13.0 | 6.92 | |
| Vanguard ESG U.S. Stock | -20.8 | 5.57 | |
| iShares ESG Aware MSCI EM | -17.1 | 5.03 | |
| iShares Global Clean Energy | -9.1 | 4.77 | |
| iShares MSCI KLD 400 Social | -18.8 | 3.6 | |
| iShares MSCI USA ESG Select | -19.6 | 3.41 | |
| iShares ESG MSCI USA Leaders | -17.8 | 3.09 | |
| Vanguard ESG International Stock ETF | -15.3 | 2.94 | |
| SPDR S&P 500 ETF Trust | -16.0 |
