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With investors becoming increasingly aware of how environmental, social and governance (ESG) factors are represented in their portfolios, it is not surprising that the number of sustainability-themed exchange traded funds (ETFs) has increased as asset managers respond to this shift in thinking enter .
A recent report by National Bank Financial Inc. (NBF) shows that as of August 9, there were 127 ESG-themed ETFs in Canada with more than $10 billion in total assets under management. Many of these have been introduced in the last three years.
The challenge for advisors is sorting through this growing list of funds.
Globe Advisor recently spoke to Daniel Straus, Director of ETF Research and Strategy at NBF, about the latest trends in ESG ETFs and how advisors can find suitable funds for their clients:
As your report notes, there is a growing number of ESG ETFs. So how does a consultant narrow down the options?
The main principle we try to instill in our advisors is to know what you are buying; what is inside. As analysts, we do this by sorting them into categories – such as strategy type and asset class – and then comparing them. From there it becomes a question of the underlying philosophy, like exclusions or inclusions, and how these align with the investor’s values. For example, some investors might block fossil fuels while others look for the best players in the energy sector.
It’s also worth noting that many ETFs have similar names but can have wildly different assessments of the types of companies that should be included in the portfolio. It is important for consultants to understand which methods match the wishes of their clients. Education is key: understanding sector distortions, fund holdings and concentration, screening criteria, etc.
How have ESG ETFs performed in recent years?
One area that has seen strong growth is fixed income ESG ETFs. ESG labeled bonds are a new breed of bonds and there are fixed income ESG ETFs that are heavily focused 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 curtains to block out controversial industries like 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 ESG investment advisors?
If you deviate from the benchmark, depending on the ESG orientation of the portfolio, you have to keep in mind that your performance will deviate. For example, look at the difference between the performance of higher-ranked ESG companies in the technology sector in the early years of the pandemic and lower-ranked ones in sectors like energy that were declining. That has reversed in 2022, with energy doing better and technology doing worse.
A final message for advisors is that the same metrics that are important to all ETF investors are also important to ESG ETF investors: fees, liquidity and diversification. Some ESG ETFs are slightly more expensive, which could make sense if more work is put into them. Higher fees will affect performance over the long term, which is also something to consider and discuss with investors.
– This interview has been edited and shortened.
– Brenda Bouw, specially for Globe and Mail
Must-reads from Globe Advisor this week
Is it time to get back into tech stocks?
Investors may be wondering if the worst is over for tech stocks after a year-long sell-off. A rally since mid-June has lifted the Nasdaq Composite Index by 23 Percent. But it’s still down more than 18 percent year-on-year, in what some investors see as a buy signal. Adam Mayers speaks to experts about the bargains for patient investors, primarily among the large and mega caps that have strong businesses and tend to fall the least in bear markets and bounce back first.
Pros and cons of paid and paid consultant models
The decision to offer broader wealth management services via a fee-based model or to adopt a fee-only practice is an important decision for advisors, prompting them to reconsider their philosophy and what they want to achieve for clients. Paid Advisors are licensed to sell products and are paid a percentage of their clients’ assets under management. Paid advisors, also known as advice-only, charge a fee for their financial advice and typically do not sell any products. Kelsey Rolfe weighs the pros and cons of both.
‘Fundamental Value’ in Psychedelics Despite Market Downturn
Rising interest rates and declining investor appetite for speculative sectors like psychedelics have devastated stock valuations. But experts say the bust has created a buying opportunity for investors willing to hold out for the long term. They say part of the challenge with investing in this sector is that it’s often mistakenly compared to the rise of the legal cannabis industry. Jameson Berkow looks at regulatory progress in psychedelics and the future.
Meme and thematic ETFs are rising as inflation fears are falling
Troubled meme and thematic exchange-traded funds have posted dramatic gains in recent weeks, bolstered by signs of a possible peak in inflation and US legislation paving the way for a clean energy boom. A handful of funds tracking these areas have all undercut the S&P 500’s decline on the way down, but outperformed its 7.4 percent gain since late July, living up to their bill as high-beta sentiment-driven investments, as per Reddit WallStreetBets are loved crowd. The Financial Times’ Steve Johnson examines the key catalysts for this trend.
What you and your customers need to know
Mortgage bank Home Capital rejects unsolicited cash takeover offer from an unnamed bidder
Home Capital Group Inc., a nonbank mortgage lender whose stock price has fallen this year, said it received an unsolicited takeover bid from an unnamed bidder, but the company’s board rejected the bid. Home Capital says it is the second time it has received a non-binding offer from the same bidder and the first time it has been with an acquisition partner. Tim Kiladze and James Bradshaw take a closer look at why the board turned down the cash offer.
Venture capital investment slipped to pre-pandemic levels in the second quarter as tech slowed
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) said 182 deals totaled $1.65 billion in VC in the second quarter, compared with $5.1 billion in the same quarter last year Year 2021 but roughly on par with 2019 second quarter investment of $1.66 billion. Josh O’Kane reports that these numbers suggest the true impact of the downturn will become more apparent in the coming quarters as data closes the gap between initial negotiation, closing and announcement of deals.
Fifteen low-carbon, low-ESG risk equity funds
As the US moves towards reducing its carbon emissions and increasing the use of green energy, investors could look to position their portfolios to take advantage of this theme. However, savvy ESG-focused investors may not be protected from broader ESG risks by a portfolio with a low-carbon focus. These risks include not only considering environmental risks, but also social and governance risks. To guide investors who are committed to an ESG-friendly and low-carbon overall portfolio, Danielle LeClair, Director of Manager Research, Canada, for Morningstar Research Inc., screened 144 equity funds that demonstrate metrics for mitigating ESG and carbon-related risks against a number of key criteria.
– Employee of the Globe consultant