Many ESG funds' top holdings may be surprisingly well-known.
Although these strategies consider a company's environmental, social and governance factors, these funds are still aimed at investing in top-performing companies across industry groups, explained DWS Group's Arne Noack.
“The idea is not to get too focused and only select a few stocks that are the best on ESG and climate principles; [to] The company's head of systematic investment solutions for the Americas said this on CNBC's “ETF Edge” earlier this week.
Noack's firm manages the XTrackers MSCI USA Climate Action Equity ETF (USCA). Its top holdings include Nvidia, Amazon, Microsoft, Apple, Meta Platforms, and Google's parent company Alphabet. These are six of the “Magnificent Seven” mega-cap tech stocks, which are also the leading stocks in ETFs that track the S&P 500.
ESG funds tend to invest more in technology stocks, said former VettaFi financial futurist Dave Nadig. Because this sector is one of the “cleaner” industries.
“If you only look at climate as a window, you're not going to end up not owning a lot of energy companies and miners. [and] We don’t own a lot of steel companies,” Nadig said. ”So ultimately it's going to be services, healthcare, technology, which is a very strong bet. ”
Currently, IT stocks account for over 30% of USCA's allocation. According to the Xtracker website. This is more than double the fund's second-largest sector allocation (13.5% to health care).
But Noack believes the idea that ESG funds only invest in clean and sustainable sectors is misleading.
“There is sometimes a misconception that ESG funds cannot invest in energy companies, but that is simply not true. Energy is an important component of our economy,” he said.
Is ESG still relevant?
According to Morningstar, global ESG funds posted quarterly net outflows for the first time on record in the fourth quarter of 2023. But Nadig points out that while financial advisors may have stopped recommending ESG funds to their clients, investor interest hasn't gone anywhere.
”[Advisors] I was pulled back. Probably they won't come back. But the demand from individuals never waned,” Nadig said. “What disappeared was the hot money of people who thought this was going to be a momentum play.” It wasn't a powerful play. This is a long-term way to approach quotas. ”
XTrackers MSCI USA Climate Action Stock ETF rises nearly 9% So far this year.
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