Some ESG Funds Are Booming. That’s Not the Whole Picture

Cleanup on aisle Energy.

Some clean energy funds have outperformed this year, particularly the First Trust Nasdaq Clean Edge Smart Grid Infrastructure Index Fund, or GRID, which invests heavily in electric infrastructure. The fund has raked in more than $3 billion since the start of the year, according to a recent Bloomberg report. Other exchange-traded funds with an environmental, social and governance focus, like Invesco’s Solar ETF (TAN) and First Trust’s Global Wind Energy ETF (FAN), are up 18% and 31% year to date, respectively. But while ETFGI reported the total assets in this category to be nearly $800 billion and steadily increasing, data from Fuse showed net sales from last year to be in the red for both diversified and themed ESG products.

“ESG has faced political scrutiny, which has prompted many managers to rename or refine the focus of their strategies,” said Cindy Zarker, client relationship manager at Fuse Research Network. “Funds that could be used as core holdings in portfolios, like the State Street SPDR S&P 500 ESG ETF, [had] outflows last year and year to date, even though it has a five-star rating from Morningstar.”

ESG, Then and Now

Part of the issue is that there isn’t a widely agreed-upon definition of what counts as ESG, and performance across different metrics is inconsistent. The current outperforming funds aren’t the diversified, core portfolio offerings of yore but instead more tactical, specific and themed products, said Steven Foy, SVP of trading at Tidal Financial Group. Traditionally, diversified ESG products were tech-heavy and functioned as core holdings. Now, these funds are more thematic and include leveraged single-stock products, which help investors “capitalize on specific trends instead of relying on generalized frameworks like traditional ESG.”

Some of the largest ESG funds have had mixed performance year to date:

• The aforementioned GRID manages $7.6 billion and is up 24.8%.
• The Nuveen ESG Large-Cap Growth ETF (NULG), which holds $2.3 billion in assets, is up 6.8%.
• The iShares ESG US Aggregate Bond ETF (EAGG) has $4.6 billion in assets but is down 1%.

Where to Go from Here? With AI data centers and the current war in Iran driving up the price of energy, the focus should be on which themes will be the best long-term investments rather than ESG per se, Zarker said. “[Interest in ESG] is more because of things like AI, bitcoin mining and the war in Iran. All of those things [focus] on… this whole electric grid build-out, the need for less reliance on oil, and all those kinds of things,” she said. “So it’s more thematic than ESG.”