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As investors pay closer 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) has been rising as asset managers cater to this shifting mindset.
A recent National Bank Financial Inc. (NBF) report shows there were 127 ESG-themed ETFs in Canada, as of Aug. 9, with total assets under management of more than $10-billion. Many of those launched in the past three years.
The challenge for advisors is sorting through this growing list of funds.
Globe Advisor spoke recently with Daniel Straus, director of ETF research and strategy at NBF, about the latest trends in ESG ETFs and to find out how advisors can find suitable funds for their clients:
As your report notes, there are a growing number of ESG ETFs. So, how does an advisor narrow down the options?
The main principle we try to communicate to advisors is to know what you’re buying; what’s inside. As analysts, we do this by sorting them into categories – such as type of strategy and asset class – and then comparing them. From there, it becomes a question of the underlying philosophy, such as exclusions or inclusions, and how those align with the investor’s values. For example, some investors might block out fossil fuels while others look for the best actors in the energy sector.
It’s also worth noting that many ETFs have similar names but can have a very different assessment of the types of companies that should be included in the portfolio. It’s important for advisors to understand which methodologies 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 has been growing quite a lot is fixed income ESG ETFs. ESG-labelled bonds are a new kind of bond, and there are fixed-income ESG ETFs that focus heavily on these bonds.
Actively managed ESG ETFs are also a growing category. ESG used to be synonymous with taking the index and applying some light screens to block out controversial industries such as energy, tobacco and firearms. Now, the energy subconversation alone takes up an enormous part of the mindshare around ESG.
What other advice do you have for advisors on ESG investing?
If you’re diverging from the benchmark, depending on the ESG bias of the portfolio, you need to remember that your performance will diverge. For example, look at the difference between the performance of higher-ranking ESG companies in the technology sector during the first couple of years of the pandemic and lower-ranking ones in sectors such as energy, which fell. That has reversed in 2022, with energy outperforming and tech underperforming.
A final message for advisors is that the same metrics important to all ETF investors are still important to ESG ETF investors: fees, liquidity, and diversification. Some ESG ETFs are a bit more expensive, which could make sense if more work goes into them. Higher fees affect performance in the long run, which is also something to consider and discuss with investors.
- This interview has been edited and condensed.
- Brenda Bouw, special to the Globe and Mail
Must-reads from Globe Advisor this week
Is it time to jump back into tech stocks?
Investors may be wondering if the worst is over for technology stocks after a grinding year-long sell-off. A rally since mid-June has lifted the Nasdaq Composite Index by 23 per cent. But, it’s still down by more than 18 per cent on the year, which some investors see as a signal to buy. Adam Mayers speaks to experts about the bargains for patient investors, mainly among the large and mega caps that have strong businesses and tend to fall least in bear markets and rebound first.
Pros and cons of fee-based and fee-only advisor models
The decision to offer broader wealth management services through a fee-based model or adopt a fee-only practice is a major one for advisors, prompting them to consider their philosophy and what they hope to achieve for clients. Fee-based advisors are licensed to sell products and are paid on a percentage of their clients’ assets under management. Fee-only advisors, also known as advice-only, charge a fee for their financial advice and typically don’t sell products. Kelsey Rolfe weighs the benefits and drawbacks of both.
‘Fundamental value’ in psychedelics despite market downturn
Rising interest rates and falling investor appetite for speculative sectors such as psychedelics have crushed the stocks’ valuations. But experts say the bust has created a buying opportunity for investors willing to stick it out for the long term. They say part of the challenge with investing in the sector is that it’s often compared incorrectly with the rise of the legal cannabis industry. Jameson Berkow looks at regulatory progress in psychedelics and what lies ahead.
Meme and thematic ETFs surge as inflation fears dip
Beaten-up meme and thematic stock exchange-traded funds have made dramatic gains in recent weeks, buoyed by signs of a possible peak in inflation and U.S. legislation paving the way for a boom in clean energy. A handful of funds tracking these spaces all undershot the S&P 500′s slide on the way down but have beaten its 7.4 per cent rise since late July, living up to their billing as sentiment-driven, high-beta investments beloved by the Reddit WallStreetBets crowd. Steve Johnson of the Financial Times explores the key catalysts for this trend.
What you and your clients need to know
Mortgage lender Home Capital rejects all-cash unsolicited takeover offer from an unnamed bidder
Home Capital Group Inc., a non-bank mortgage lender whose share price has tumbled this year, said it received an unsolicited takeover offer from an unnamed bidder, but the company’s board of directors has rejected the proposal. Home Capital says this is the second time it has received a non-binding proposal from the same bidder, and the first one was made with a takeover partner. Tim Kiladze and James Bradshaw take a closer look at why the board rejected the all-cash offer.
Venture capital investment slides to pre-pandemic levels in the second quarter amid tech slowdown
Venture-capital (VC) funding in Canada fell to pre-pandemic levels in the second quarter (Q2) as the tech downturn hit privately held companies. A new report from the Canadian Venture Capital and Private Equity Association (CVCA) says there was $1.65-billion in VC deployed across 182 deals in Q2, down from $5.1-billion in the same quarter in 2021, but roughly on par with 2019′s $1.66-billion Q2 investment. Josh O’Kane reports that these figures suggest the downturn’s true impact will be revealed more starkly in the coming quarters as data catches up with the gap between when deals are first negotiated, closed and then announced.
Fifteen low-carbon equity funds with low ESG risk
As the U.S. moves toward reducing its carbon emissions and increasing its use of green energy, investors may be looking to position their portfolios to benefit from this theme. For savvy ESG-oriented investors, however, a portfolio with a low-carbon focus may not shield them from broader ESG risks. These risks include consideration of not just environmental risks, but also social and governance risks. To guide investors dedicated to an overall ESG-friendly and low-carbon portfolio, Danielle LeClair, director of manager research, Canada, for Morningstar Research Inc., screened 144 equity funds that exhibit metrics mitigating ESG and carbon-related risks using several key criteria.
- Globe Advisor Staff