Investing with a purpose and virtue is a priority for a growing number of investors. That could pave the way for growth for environmental, social and governance (ESG) products in 2018. Exchange traded funds (ETFs) adhering to virtuous investing styles and themes are expected to grow as well.
One ESG ETF investors may want to consider is the Oppenheimer ESG Revenue ETF (ESGL). ESGL debuted in October 2016 and tracks the OFI Revenue Weighted ESG Index. The ETF is smart beta fund that can provide investors with an alternative or complement to traditional large-cap U.S. equity exposure.
“The strategy provides access to the top 50% of securities in the S&P 500 Index by ESG score, excluding those with a detrimental score for controversies, and is weighted by top line revenue instead of market capitalization,” according to Oppenheimer.
Like many ESG ETFs, ESGL is still waiting to gain traction with investors. At 14 months old, the ETF has $25 million in assets under management. That is a decent sum for an ETF of that age, but more growth could happen and happen sooner than later as more investors embrace ESG strategies.
“ESG investing already has a strong presence in the institutional market, and we are seeing evidence of this trend playing out as more ESG funds and exchange traded funds (ETFs) for retail investors are being introduced,” said Oppenheimer. “We anticipate that this growth will continue.”
Going Inside ESGL
At the end of third quarter, ESGL's holdings had a weighted average market value of almost $99.1 billion, underscoring the fund's large-cap focus. More importantly, ESGL has rapidly earned Morningstar's 5 Globes rating, that research firm's highest rating for ESG and sustainable investments.
“A fund with a Sustainability Rating of 5 globes is one whose overall holdings fare better on ESG metrics than those of 90% of its peers,” said Morningstar. “It is an indicator to investors that a fund's underlying investments have strong sustainability characteristics. The Sustainability Rating allows investors to include sustainability alongside other criteria to evaluate funds.”
At the end of the third quarter, ESGL's largest sector weights were consumer discretionary, industrials and consumer staples, meaning the ETF was significantly overweight those sectors relative to the S&P 500. Conversely, ESGL is underweight technology, financial services and healthcare, the three largest sector weights in the S&P 500, compared to the U.S. equity benchmark. Year-to-date, ESGL is higher by nearly 19%.
ESGL's sustainability score is notably higher than the S&P 500's, but the ESG ETF's price-to-book, price-to-earnings and price-to-sales ratios indicate the fund trades at a discount to broad measures of U.S. stocks.
Not all ETFs that come to market have the benefit of being well-timed or find a receptive audience. Data suggest that neither is true of ESGL. Specific groups of investors are already boosting ESG funds and that growth could trickle down to ESGL in the future.
“Women and millennials are responsible for the doubling of ESG assets to $8.1 trillion worldwide since 2014 — and you can expect that trend to continue,” reports InvestmentNews. “That interest has been spurred by the advent of new ESG products, such as ETFs, that make it easier for average investors to participate in socially responsible investing. Even 10 years ago, ESG products were limited to a handful of mutual funds and vehicles aimed at high-net-worth investors.”
In additional to its ESG foundation, ESGL's revenue-weighted methodology can help investors avoid overvalued stocks while providing exposure to undervalued names at a time when the value factor is widely expected to rebound in 2018.