Many ESG funds’ top holdings may be surprisingly familiar.
Arne Noack of DWS Group explains that while these strategies take into account a company’s environmental, social and governance factors, the funds still aim to invest in the best-performing companies within each industry group.
“The idea is not to be overly concentrated and select only a handful of stocks that perform best in terms of ESG or climate principles, but still have a portfolio that largely resembles the makeup of the U.S. economy,” said the firm’s Americas System Investment Solutions The person in charge told CNBC’s “ETF Edge” earlier this week.
Noack’s company manages the Xtrackers MSCI U.S. Climate Action Equity ETF (USCA). Its main holdings include Nvidia, Amazon, Microsoft, apple, meta platform and Google’s parent company letter — Six of the “big seven” mega-cap tech stocks that also lead the ETFs that track the S&P 500.
Former VettaFi financial futurist Dave Nadig said ESG funds also tend to invest more in technology stocks because the industry is one of the “cleaner” industries.
“If you just look at climate as a window, you might end up not owning a lot of energy companies, you’re not going to own a lot of miners (and) you’re not going to own a lot of steel companies,” Nadig said. “So, you end up with something that looks like a service, health care and science and technology, which is a very safe bet. “
Information technology stocks currently account for more than 30% of USCA’s allocation, According to Xtracker’s website. That’s more than double the fund’s second-largest industry allocation (13.5% to health care).
But Noak believes the idea that ESG funds only invest in clean, sustainable industries is misleading.
“Sometimes there is a misconception that ESG funds cannot invest in energy companies. This is absolutely wrong. Energy is an important part of our economy,” he said.
Does ESG still matter?
According to Morningstar, global ESG funds experienced their first-ever quarterly net outflows in the fourth quarter of 2023. However, Nadig noted that while financial advisors may no longer recommend ESG funds to clients, investor interest has not disappeared.
“(The consultants) withdrew. They may not come back. However, the individual needs never really abated,” Nadig said. “What’s gone is hot money, and people thought it was going to be a momentum play. It’s not a momentum play. It’s a long-term way to approach distribution.”
Xtrackers MSCI U.S. Climate Action Stock ETF rises nearly 9% So far this year.
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