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As investors pay more attention to how environmental, social and governance (ESG) factors are represented in their portfolios, it’s no surprise that the number of sustainability-themed exchange-traded funds (ETFs) is rising as asset managers cater to this changing mindset. .
The latest National Bank Financial Inc. (NBF) report showed there were 127 ESG-themed ETFs in Canada, as of Aug. 9, with total assets under management of more than $10-billion. Many of them started in the last three years.
The challenge for advisors is sorting through this growing list of funds.
GlobeAdvisor recently spoke with Daniel Strauss, director of ETF research and strategy at NBF, to find out about the latest trends in ESG ETFs and how advisors can find the right funds for their clients:
As your report notes, the number of ESG ETFs is increasing. So, how does a consultant narrow down the options?
The main principle we try to communicate with advisors is to know what you are buying; What’s inside As analysts, we do this by dividing them into categories – such as strategy type and asset class – and then comparing them. From there, it becomes a question of the underlying philosophy of exclusion or inclusion and how that aligns with investor values. For example, some investors may restrict fossil fuels while others look for the best actors in the energy sector.
It’s worth noting that many ETFs have similar names but may have different valuations of the types of companies that should be included in the portfolio. It is important for advisors to understand which methods align with what their clients want to do. Education is key: understanding sector biases, fund holdings and concentration, screening criteria, etc.
How have ESG ETFs evolved in recent years?
One area that is growing quite a bit is fixed income ESG ETFs. ESG-labeled bonds are a new type of bond, and there are fixed-income ESG ETFs that focus heavily on these bonds.
Actively managed ESG ETFs are also a growing category. It is synonymous with taking an ESG index and applying some light curtains to block out controversial industries like energy, tobacco and firearms. Now, the energy sub-conversation takes up an enormous part of the mindshare around ESG.
What other advice do you have for advisors on ESG investing?
You should keep in mind that if you deviate from the benchmark depending on the portfolio’s ESG bias, your performance will differ. For example, look at the difference between the performance of top-ranked ESG companies in the technology sector in the first couple of years of the pandemic, and lower rankings in sectors like energy. That reverses in 2022, with energy dominating and tech underperforming.
The final message to advisors is that the same metrics as all ETF investors are still important to ESG ETF investors: fees, liquidity and diversification. Some ESG ETFs are a bit more expensive, which makes sense if more work goes into them. Higher fees affect performance in the long run, which is something to consider and discuss with investors.
– This interview has been edited and condensed.
— Brenda Bouve, special to the Globe and Mail
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