The largest holdings of many ESG funds may be surprisingly familiar.
While these strategies take into account a company’s environmental, social and governance factors, these funds still focus on investing in the best companies in different industry groups, explained Arne Noack of DWS Group.
“The idea is not to be hyper-concentrated and pick only a few stocks that perform best from an ESG or climate perspective, but to [to] we still have a portfolio that in many ways resembles the economic structure of the U.S. economy,” the head of systematic investment solutions for the Americas said on CNBC’s “ETF Edge” earlier this week.
Noack’s firm manages the Xtrackers MSCI USA Climate Action Equity ETF (USCA). His largest assets include Nvidia, Amazon, Microsoft, Apple, Meta platforms and parent company of Google Alphabet — six mega-cap tech stocks from the Magnificent Seven that also top ETFs tracking the S&P 500.
ESG funds also tend to invest more heavily in tech stocks because the sector is one of the “cleaner” industries, according to former VettaFi financial futurist Dave Nadick.
“If you look at climate solely as your window, you probably won’t own a lot of energy companies, you probably won’t own a lot of mining companies. [and] doesn’t own a lot of steel companies,” Nadig said. “As a result, you get something similar to services, healthcare And technologieswhich is a very strong bet.”
Information technology stocks currently make up more than 30% of USCA’s allocation. according to the Xtracker website. That’s more than double the fund’s share of the second-largest healthcare sector, at 13.5%.
But Noack says the idea that ESG funds only invest in clean, sustainable industries is misleading.
“There is sometimes a misconception that ESG funds cannot invest in energy companies. This is absolutely false. Energy is a vital component of our economy,” he said.
Is ESG still relevant?
In the fourth quarter of 2023, global ESG funds recorded net quarterly outflows for the first time, according to Morningstar. However, Nadig notes that while financial advisors may have moved away from recommending ESG funds to clients, investor interest has not gone away.
“[Advisors] pulled it back out. They probably won’t come back. However, demand from individuals has never really waned,” Nadig said. “What’s gone is the hot money of people who thought it was going to be some kind of impulse play. This is not an impulsive game. This is a long-term approach to allocating funds.”
Xtrackers MSCI USA Climate Action Equity ETF Up Almost 9% this year.
Denial of responsibility