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Another difficult month-February 2022
A rough start to the year for both stocks and bonds was followed in February by another difficult month as the Russian invasion of Ukraine intensified and the West responded with an unprecedented, coordinated response in the form of sanctions and a U.S. ban on imported Russian oil, liquified natural gas and coal. Returns across…
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The Bottom Line: Another difficult month for stocks and bonds but returns posted by clean energy funds show value of patience and long-term investing horizon.
Negative year-to-date results for stocks and bonds widened in February: S&P 500 -2.99% and Bloomberg Aggregate -1.12%
A rough start to the year for both stocks and bonds was followed in February by another difficult month as the Russian invasion of Ukraine intensified and the West responded with an unprecedented, coordinated response in the form of sanctions and a U.S. ban on imported Russian oil, liquified natural gas and coal. Returns across indices ranged from as high of 14.1% recorded by gold, metals and mining and Brent Crude, to a low of -42.76% posted by the MSCI Emerging Markets Eastern Europe NR USD Index. The S&P 500 gave up 2.99% in February and recorded a year-to-date decline of 8.01%. Of 19 trading days, the S&P 500 experienced 10 daily declines, with six of these exceeding 1%. Refer to Chart 1. The Dow Jones Industrial Average gave up 2.01% while the NASDAQ Composite posted a drop of 3.35%. Small cap stocks and mid-cap stocks, both registering positive results, outperformed large caps while value stocks outperformed growth stocks.
Chart 1: S&P 500 cumulative price performance-February 2022
Source: Yahoo finance/S&P Global
Overseas markets, according to the MSCI ACWI ex USA Index, registered a 1.98% decline while the narrower MSCI EAFE Index was off 1.77%. Emerging markets, measured by the MSCI Emerging Markets Index, declined -2.99%.
Bond market investors, who were concerned about slowing economic growth in response to central bank efforts thus far to curb inflation by raising interest rates, lowered somewhat their expectations with regard to the number of likely interest rate increases this year and their severity following the Ukraine invasion. Yields on 10-year Treasuries moved up from 1.79% to 2.03% on February 16 and then down to 1.83% by month-end. Against this backdrop, the Bloomberg US Aggregate Bond Index gave up 1.12% in February and -3.25% year-to-date—a likely jolt to fixed income investors.
Sustainable mutual funds and ETFs posted an average return of -1.94% in February
The universe of sustainable mutual funds and ETFs, as defined by Morningstar, a total of 1,319 funds, posted an average return of -1.94% in February. Together, fixed income mutual funds and ETFs dropped 1.5% in February while equity-oriented funds gave up 2.22%.
Returns ranged from a high of 19.82% to a low of -10.23%. The best return was recorded by the Direxion Daily Global Clean Energy Bull 2X Shares (KLNE), a fund that seeks to magnify the daily performance of the S&P Global Clean Energy Index. The index tracks the performance of companies from developed markets whose economic fortunes are tied to the global clean energy business. Funds investing in alternative and clean energy posted very strong returns in February and led the list of the best performing funds for the month. In doing so, funds in operation for 12-months or longer reversed between a third to 56% of the declines experienced during the trailing 12-months. Refer to Table 1 for a list of the top 10 fund performers.
At the other end of the range was the Ashmore Emerging Markets Equity ESG Fund A which was likely impacted by its reported 10.08% exposure to Russian stocks as of its October 31, 2021 fiscal year-end. Some or all the fund’s holdings were likely carried into the February 24 invasion of Ukraine. The fund qualifies eligible securities on the basis to an ESG scoring methodology that helps identify high quality companies with strong performance or potential when measured against Ashmore’s ESG criteria. The fund also avoids investing in issuers that the adviser determines have significant involvement (i.e., more than 10% of revenues) in the manufacture, distribution or sale of fossil fuels or tobacco products and in gambling, pornography or defense (including controversial weapons) industries, or other issuers that engage in business practices that the adviser determines to be sub-standard from an ESG or sustainability perspective in relation to their industry or sector.
Table 1: Top performing sustainable investment funds in February 2022
Fund Name
$ AUM
TR
February 2022 (%)
TR
Year-to-Date (%)
TR
Trailing 12-Months (%)
Direxion Dl Global Clean Energy Bull 2X Shares (KLNE)
6.8
19.82
-7.04
Global X Hydrogen ETF (HYDR)
28.3
15.12
-11.87
VanEck Green Metals ETF (GMET)
26.6
12.96
8.92
Global X Solar ETF (RAYS)
9.4
11.81
-6.56
iShares Global Clean Energy ETF (ICLN)
5,192.1
10.62
-2.18
-18.84
Defiance Next Gen H2 ETF (HDRO)
56.2
10.57
-15.93
Global X CleanTech ETF (CTEC)
109
10.34
-8.21
-31.27
Direxion Hydrogen ETF (HJEN)
35.3
9.91
-6.87
Invesco Solar ETF (TAN)
2,214.9
9.68
-7.78
-29.34
Fidelity Clean Energy ETF (FRNW)
25.7
9.63
-5.54
Notes of Explanation: $AUM in millions. Blank cells=fund was not in operation during entire interval. Source: Morningstar Direct.
Only two of six selected ESG equity and bond indices outperformed their conventional counterparts in February
Only two of six ESG equity and bond indices outperformed their conventional counterparts over the month of February, including investment-grade intermediate term bonds as well as small cap stocks.
The MSCI ESG Focus Aggregate Bond Index beat the Bloomberg US Aggregate Bond Index by a wide margin of 85 bps, and now leads the conventional benchmark over the tailing one-year and three-year intervals. ESG screened US small stocks outpaced non-ESG small cap stocks in February by 30 bps. While ESG screened small-caps also widened their lead over the one-year interval, the MSCI USA Small Cap ESG Leaders Index continues to lag over the intermediate and long-term.
Stocks indices tracking large and mid-cap stocks in the US and foreign markets, developed as well as emerging markets, trailed their conventional benchmarks in February, underperforming within a range that extends from 40 bps to 143 bps.
While not included in the analysis of the six ESG equity indices, it’s instructive to note that the MSCI USA ESG Leaders Index, with its February return of -3.33%, trailed by 70 bps the -2.63% return registered by the S&P 500 ESG Index. Both indices track large and mid-cap US stocks but differing construction methodologies leads to sector and individual stock differences, both in terms of holdings and their weights. In fact, the S&P 500 Index has outperformed the MSCI USA ESG Leaders over short, intermediate and long-term time horizons, illustrating that index selection can matter.
Chart 2: Selected sustainable indices intermediate and long-term total return performance results to February 28, 2022
Notes of Explanation: MSCI equity indices are the Leaders indices. Blanks indicate performance results are not available. Intermediate and long-term results include 3-5-and 10-year returns that are expressed as average annual returns. MSCI USA Small Cap returns are price only. Sources: MSCI, S&P Global, Sustainable Research and Analysis LLC.
SRA Select List of funds posted an average decline of -2.17% in February
Based on an equal weighting basis, SRA Select funds posted an average decline of 2.17% in February versus an average -1.71% decline registered by the average performance of corresponding conventional benchmarks¹. Excluding money market funds, returns ranged from 1.08% posted by the iShares ESG Aware MSCI USA Small-Cap ETF (ESML) to a low of -5.94% registered by the iShares ESG MSCI EM Leaders ETF (LDEM). Refer to Table 2 for a complete rundown of SRA Select list of mutual funds and ETFs and their February performance results.
Consisting of nine funds² pursuing discrete investment strategies intend for use as building blocks in the creation of a diversified ESG-oriented portfolio, only three of the nine funds outperformed their conventional benchmarks in February (Refer to previously published article SRA Select Listing: ESG Integration Investment Fund Q1-2022 https://sustainableinvest.com/sra-select-listing-esg-integration-investment-funds-q1-2022/).
¹ To avoid duplications, these results exclude Vanguard Treasury Money Market Fund and S&P 500.
² A tenth fund, the Vanguard Treasury Money Market Fund, is an alternative money market fund.
Table 2: Performance of SRA Select listed mutual funds and ETFs
Fund Name
Expense
Ratio (%)
$ AUM
1-
Month Return (%)
12-Month Return (%)
3-Year Average (%)
iShares ESG Advanced Hi Yld Corp Bd ETF (HYXF)
0.35
169.6
-1.32
-0.99
4.18
iShares ESG Aware MSCI EAFE ETF (ESGD)
0.2
7,300.9
-3.48
2.47
8.28
iShares ESG Aware MSCI USA Small-Cap ETF (ESML)
0.17
1,531.6
1.08
0.6
13.47
iShares ESG U.S. Aggregate Bond ETF (EAGG)
0.1
1,985.9
-1.12
-2.78
3.21
iShares Global Green Bond ETF (BGRN)
0.2
262
-2.34
-4.27
2.35
iShares MSCI ACWI Low Carbon Target ETF (CRBN)
0.2
1,243.2
-3.09
7.64
13.87
iShares MSCI KLD 400 Social ETF (DSI)
0.25
3,765
-3.32
15.82
18.97
iShares ESG MSCI EM Leaders ETF (LDEM)
0.16
71.4
-5.94
-10.08
BlackRock Liquid Environmentally Aware Fund (LEAXX)
0.45
1136.7
-0.01
-0.05
Vanguard Treasury Money Market Fund Investor (VUSXX)
0.09
34,199
0.01
0.02
0.74
Average Returns*
-2.17
0.93
9.19
S&P 500 Index
-2.99
16.39
18.24
MSCI USA Index
-2.93
14.38
18.43
MSCI USA Small Cap Index
0.9
-0.67
11.22
MSCI EAFE Index
-1.77
2.83
7.78
MSCI ACWI Index
-2.58
7.81
13.41
MSCI Emerging Markets Index
-2.99
-10.69
6.04
Bloomberg U.S. Treasury Bill (1-3 M)
0.01
0.04
0.08
Bloomberg U.S. Aggregate Bond Index
-1.12
-2.64
3.3
Bloomberg High Yield Index
-2.39
-3.91
3.02
ICE BofML Green Bond Hedged US Index
-2.49
-6.29
1.08
Average Returns
-1.71
0.10
7.15
Notes of Explanation: $AUM in millions. Blank cells=fund was not in operation during entire interval. *Average returns exclude the Vanguard
Treasury Money Market Fund Investor. Source: Morningstar Direct.
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