On this week’s “ETF Prime,” host Nate Geraci was joined by Lara Crigger, editor-in-chief at VettaFi, to discuss ESG ETF flows and performance in 2022 as well as the SEC’s proposals that would affect ESG disclosures and ETF names for ESG-related funds. Later Geraci is joined by Wendy Wong, head of sustainable investment partnerships at New York Life Investment, who talked about the IQ Dual Impact ETF suite. Last on was Sonja Formato, senior director at ACA Foreside, to provide an overview of ETF distribution, which included a look at mutual fund conversions to ETFs and more.
ESG ETFs have seen a marked slowdown of inflows, bringing in $3.4 billion year-to-date, with total assets in ESG ETFs at approximately $102 billion, a drop in the water next to the over $7 trillion in assets within ETFs. The space is dominated largely by a handful of broad-based core ETFs that can slot easily into a portfolio, such as the iShares ESG Aware MSCI USA ETF (ESGU) and the iShares ESG Aware MSCI EM ETF (ESGE ).
“We’re seeing engagement and traffic across all themes and topics related to ESG significantly down year-to-date; part of that is because January tends to be a high month and we’re entering the slow summer month season,” Crigger explained. “That said, the trend really is unmistakable and undeniable.”
While individual ETFs have fared better as to advisor interest on the VettaFi website, even those have experienced reduced traffic and research interest. The trend isn’t because of a swinging pendulum in favor of oil. Engagement is also down for oil ETFs largely. Instead, interest and flows have all largely gone into broader-based funds and agricultural commodity funds this year, particularly given the global macro environment.
“What I think is really the struggle or the challenge for ESG ETFs right now is that they comprise largely of large-cap growth tech stocks — that is a sector that not many people want to be in right now because of interest rate rises,” Crigger said.
ESG ETFs seeing inflows included the Freedom 100 Emerging Markets ETF (FRDM), the Goldman Sachs Future Planet Equity ETF (GSFP), the Global X Conscious Companies ETF (KRMA ), and the KraneShares European Carbon Allowance Strategy ETF (KEUA).
Crigger also discussed the SEC’s proposed regulations around ESG disclosures and naming requirements for ESG funds to accurately reflect the assets they carry in an attempt to address greenwashing.
Dual Impact Investing
Next on was Wendy Wong, head of sustainable investment partnerships at New York Life Investment, who discussed the suite of dual impact ETFs that they offer that all contribute a portion of their management fees to nonprofit organizations reflected in each fund’s strategy and the indexes they track. Recipients of the donations include the American Heart Association, Girls Who Code, the National Wildlife Federation, and Oceana.
“It combines the potential for financial gains — we are an investment manager, of course — through impact investing, all while helping to inspire change,” Wong said. “We like to think of it as a double bottom-line approach to ESG investing.”
The funds include the IQ Healthy Hearts ETF (HART), the IQ Cleaner Transport ETF (CLNR), the IQ Engender Equality ETF (EQUL), and the IQ Clean Oceans ETF (OCEN).
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ETF Distribution in 2022
Last on was Sonja Formato, senior director at ACA Foreside, a governance, risk, and compliance advisor as well as the largest third-party distributor with $1.3 trillion in assets under distribution, $180 billion of that from ETFs. ACA Foreside touches on almost every aspect of the ETF industry, from banks and financing to legal counsel, and has a front row view of trends within ETFs coming to market, including the increase in mutual fund conversions to ETFs.
“The marketplace is attracting interest in ETFs and all types of managers; obviously they want to come to market and scale is very important,” Formato said. “We’ve been working with a lot of different clients and we’ve had that front row seat during those conversions.”
Formato goes on to discuss a comprehensive look at when mutual fund conversions make sense, the role that semi-transparent ETFs can play, and access for issuers to platforms.
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