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Aug 25, 2020

Biggest ESG ETFs are being overshadowed by clean-energy funds

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This year’s rally in exchange-traded funds specializing in clean energy is leaving larger peers in the environmental, social and governance sector far behind.

One example is the US$1.2 billion Invesco Solar ETF’s 75 per cent jump this year, which exceeds the 9 per cent climb in the US$8.6 billion iShares ESG Aware MSCI USA ETF, the biggest such fund in the ESG space. The S&P Global Clean Energy Index has climbed 41 per cent this year, compared with an advance of 2 per cent in a global stock market gauge.

A range of factors have been cited for the clean-tech rally, including greater investor pressure to pursue ESG themes, maturing wind and solar industries that demonstrated resiliency after the collapse in oil prices earlier this year, as well as the prospect of huge government spending on green projects.

“An S&P 500 ESG versus the niche clean energy ETF, you are still going to see very significant differences in ESG style and therefore outcome in performance and composition, as well in terms of securities,” said Cathrine de Coninck-Lopez, global head of ESG with Invesco.

Other clean-energy ETFs, such as the First Trust Nasdaq Clean Edge Green Energy Index Fund, the Invesco WilderHill Clean Energy ETF, ALPS Clean Energy ETF and SPDR S&P Kensho Clean Power ETF, are all up at least 40 per cent this year.

Major broad-based ESG ETFs trail behind. The US$2.6 billion Xtrackers MSCI USA ESG Leaders Equity ETF is up about 6 per cent over the same period, while the US$1.9 billion Vanguard ESG US Stock ETF has posted an 11 per cent gain.

The iShares ESG Aware MSCI USA’s top holdings are familiar names Apple Inc. and Microsoft Corp. Invesco Solar’s biggest investments, like SolarEdge Technologies Inc. and Sunrun Inc., have more than doubled year-to-date, well ahead of the tech giants.

ESG ETFs have attracted more than US$35 billion of net inflows so far in 2020, and assets across all types of ESG funds topped US$1 trillion for the first time last quarter, a Morningstar Inc. report shows.

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