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Sustainable stock and bond funds post an average gain of 6.5% in July
Stocks started the third quarter in better form after the declines suffered in the first half of the year. Corporate earnings were more resilient relative to expectations. With 56% of the S&P 500 companies reporting by the end of July, according to FactSet nearly 75% reported per share earnings ahead of expectations. Overall, earnings were…
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The Bottom Line: Stocks and bonds were up while sustainable mutual funds and ETFs posted an average 6.50% total return, led by renewable energy funds.
Stocks started the third quarter in better form after the declines suffered in the first half of the year with US stocks adding 9.2% and bonds posting a gain of 2.44%
Stocks started the third quarter in better form after the declines suffered in the first half of the year. Corporate earnings were more resilient relative to expectations. With 56% of the S&P 500 companies reporting by the end of July, according to FactSet nearly 75% reported per share earnings ahead of expectations. Overall, earnings were on track to rise 6% in the second quarter. While this would mark the slowest rate since the end of 2020, investors may have been relieved that company performance results did not seem to weigh too heavily on company balance sheets due to inflation and slower economic growth. In fact, the U.S. economy shrank at a 0.9% annual rate in the second quarter, according to the Commerce Department, marking the second consecutive quarterly decline in GDP that by some accounts constitutes a recession. This did not deter the Federal Reserve from raising its federal-funds rate by 75 bps to a range between 2.25% and 2.75% in its efforts to bring inflation down. Stocks across the board registered gains ranging from 9.2% for the S&P 500, 6.8% for the Dow Jones Industrial Average and 12.0% for the Nasdaq Composite. The S&P 500 was in positive territory throughout the month but picked up momentum starting on July 14th following which it only registered three down days. Refer to Chart 1. Growth stocks rebounded across small, mid-cap and large-cap stocks, ranging from 11.6% to 12.8%, respectively. Small cap stocks, measured by the Russell 2000, recorded a gain of 10.4%. All 11 industry sectors across the board posted gains, led by large cap gains in the Consumer Discretionary (18.9%) and Information Technology (13.5%) sectors that took over leadership starting in mid-June from the Utilities, Consumer Staples, and Healthcare sectors. That said, worries about inflation, higher interest rates and corporate profit growth were in part responsible for pulling the S&P 500 down 12.6% on a year-to-date basis.
Stocks also rebounded overseas, particularly in developed markets, with the MSCI All Country World, ex US Index posting a gain of 3.5% while the MSCI EAFE Index added 5.0%. Emerging markets, on the other hand, gave up 0.2% according to the MSCI Emerging Markets Index. China was down 9.4%.
Most commodity prices have started to put the brakes on recently. The Bloomberg Commodity Index, ex Energy, recorded a decline of 0.6%. Natural gas was a strong exception, scoring a gain of 52.9% while a composite of crude oil prices dropped 2.7%.
After the first two quarters of 2022 recorded the worst US bond market returns since 1980 on the back of significant increases in US interest rates, July also delivered a positive beginning for bonds at the start of the third quarter and offered investors some relief from year-to-date and trailing 12-month declines. The US bond market returned 2.44%, according to the Bloomberg US Aggregate Bond Index while the global bond market returned 2.13% per the Bloomberg Global Aggregate Bond Index.
Chart 1: S&P 500 Index cumulative price only rates of return-July 2022Source: Yahoo Finance
Sustainable mutual funds and ETFs posted an average return of 6.50%
The universe of sustainable mutual funds and ETFs as defined by Morningstar, a total of 1,343 funds as of July 31, 2022, posted an average total return of 6.50%. Returns, which reversed course from last month’s average 6.21% decline, ranged from a high of 34.93% recorded by the $5.3 million Direxion Daily Global Clean Energy Bull 2X ETF (KLNE) to -10.16% registered by the $895.3 million WisdomTree China ex-State Owned Enterprises ETF (CXSE). Refer to Tables 1a and 1b.
Leading the pack were renewable energy funds that benefited from global energy constraints due to Russia’s invasion of Ukraine and higher fossil fuel prices that are driving the U.S., Europe, China, Canada and other countries to expedite the build-out of clean energy infrastructure, strong earnings and the anticipated passage of The Inflation Reduction Act (IRA). Signed into law by President Joe Biden on August 16, the main thrust of the bill is the $369 billion provision toward clean energy assets and technologies over the next decade. The IRA provides tax credits reducing the cost to deploy new wind and solar assets, acquire new electric and hybrid vehicles, and invest in renewables and clean energy technologies, including clean hydrogen production and carbon capture and storage (CCS). According to the Rhodium Group, these provisions in the bill are likely to reduce carbon emissions 37% to 41% below 2005 levels by 2030.
Table 1a: Top 10 performing funds Table 1b: Bottom 10 performing funds
Fund Name
1-M TR
(%)
12-M TR
(%)
Fund Name
1-M TR
(%)
12-M TR
(%)
Direxion Dl Glbl Clean Ey Bull 2X Shrs
34.93
-13.33
Fidelity Advisor® Sustainable EM Eq M
-1.02
ProShares S&P Kensho Cleantech ETF
23.67
Asian Growth Cubs ETF
-1.08
-18
Firsthand Alternative Energy
23.5
-11.41
iShares ESG Advanced MSCI EM ETF
-1.15
-16.19
ALPS Clean Energy ETF
22.38
-17.12
Xtrackers MSCI EMs ESG Leaders Eq ETF
-1.46
-23.41
Invesco WilderHill Clean Energy ETF
22.3
-31.64
Nuveen ESG Emerging Markets Equity ETF
-1.52
-21.05
Global X Hydrogen ETF
20.75
-39.18
Boston Common ESG Impact Em Mkts
-1.59
SoFi Smart Energy ETF*
20.36
-18.55
iShares® ESG MSCI EM Leaders ETF
-1.84
-22.55
Invesco Solar ETF
19.78
-0.43
KraneShares MSCI China ESG Leaders ETF
-9.44
-29.59
First Trust NASDAQ Clean Edge Green Energy ETF
19.15
-6.8
Vanguard Baillie Gifford Global Positive Impact Stock Fund
-9.54
-38.2
Virtus Duff & Phelps Clean Energy ETF
19.08
WisdomTree China ex-State-Owned Enterprises ETF
-10.16
-32.63
Average
22.59
-17.31
-3.88
-25.20
Notes of Explanation: Performance covering both mutual funds and ETFs=total returns in percentage terms for periods ending May 31, 2022. 1-M=1 month, 12-M=12 months. Blank cells=fund was not in operation during entire interval. Source: Morningstar Direct.
Small cap ESG stocks aside, sustainable equity indices lagged behind their conventional counterparts in July while bonds were even
Four of five sustainable stock indices lagged behind their conventional counterparts in July while bonds were even, based on a selected set of five MSCI stock oriented ESG Leaders indices and one ESG Focus bond index.
The one exception was the MSCI USA Small Cap ESG Leaders Index that eclipsed the MSCI USA Small Cap Index by 10 bps in July. While the index also leads over the trailing 12-month period, its longer-term record, as measured over the trailing 3-, 5- and 10-year intervals, continues to fall short.
12-month ESG results favor US equities that led their conventional counterparts by 88 bps and 62 bps respectively, otherwise foreign stock ESG indices as well as the Bloomberg MSCI ESG Focus Aggregate Bond Index were lagging.
Intermediate-to-long term results continue to favor ESG benchmarks, except for small cap ESG stocks as noted above, a fractional 1 bps lag over 10-years for the MSCI USA ESG Leaders Index and a shift in the 3-year outcome of the MSCI Emerging Markets ESG Leaders Index. Refer to Chart 2.
Chart 2: Selected sustainable indices intermediate and long-term relative total return performance results to July 31, 2022Notes of Explanation: MSCI equity indices are the ESG Leaders indices while fixed income is ESG Focus. 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 increase of 4.30% in July
SRA Select funds posted an average increase of 4.30% in July versus an average 4.76% registered by the average performance of corresponding conventional benchmarks. Excluding money market funds, returns ranged from high of 10.53% recorded by the iShares ESG Aware MSCI USA Small-Cap ETF (ESML) to a low of -1.84% posted by the iShares ESG MSCI Emerging Markets Leaders ETF (LDEM). Refer to Table 2 for a complete rundown of SRA Select list of mutual funds and ETFs and their July performance results.
Consisting of nine funds pursuing discrete investment strategies intend for use as building blocks in the creation of a diversified ESG-oriented portfolio, five of the nine funds outperformed their conventional benchmarks in July. (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/).
Table 2: Performance of SRA Select listed mutual funds and ETFs-July 2022
Fund name/Index
Expense Ratio (%)
Assets
($ M)
1-Month Total Return (%)
3-Month Total Return (%)
12-Month Total Return (%)
3-Year Average TR (%)
iShares ESG Advanced Hi Yld Corp Bd ETF (HYXF)
0.35
135.7
6.32
0.26
-8.03
1.03
iShares ESG Aware MSCI EAFE ETF (ESGD)
0.2
6,784.7
5.33
-2.53
-13.9
3.89
iShares ESG Aware MSCI USA Small-Cap ETF (ESML)
0.17
1,488.5
10.53
0.38
-11.12
9.62
iShares ESG U.S. Aggregate Bond ETF (EAGG)
0.1
2221.4
2.41
1.38
-9.25
-0.33
iShares MSCI ACWI Low Carbon Target ETF (CRBN)
0.2
907.3
7.04
-1.67
-10.78
8.71
iShares MSCI KLD 400 Social ETF (DSI)
0.25
3,820.3
8.66
-0.43
-7.17
13.34
iShares USD Green Bond ETF (BGRN)
0.2
274.2
2.11
0.78
-11.17
-1.93
iShares® ESG MSCI EM Leaders ETF (LDEM)
0.16
60.8
-1.84
-6.43
-22.55
BlackRock Liquid Environmentally Aware Inv A (LEAXX)
0.45
1,100.6
0.12
0.2
0.15
0.43
Vanguard Treasury Money Market Fund Investor (VUSXX)
0.09
34,903.5
0.12
0.24
0.29
0.51
Averages/Total*
0.22
51,697
4.30
-1.04
-10.72
4.82
S&P 500 Index
9.22
0.39
-4.64
13.36
MSCI USA Index
9.33
0.06
-6.87
13.2
MSCI USA Small Cap Index
10.6
0.38
-11.75
7.86
MSCI EAFE Index (Net)
4.98
-4.04
-14.32
3.16
MSCI ACWI Index (Net)
6.98
-1.92
-10.48
8.52
MSCI Emerging Markets Index (Net)
-0.25
-6.46
-20.09
0.9
Bloomberg U.S. Treasury Bill (1-3 M)
0.08
0.18
0.26
0.54
Bloomberg U.S. Aggregate Bond Index
2.44
1.49
-9.12
-0.21
Bloomberg U.S. Corporate High Yield Index
5.9
-0.98
-8.02
1.95
S&P Green U.S. Dollar Select Index
2.8
-2.61
-21.32
-4.69
Averages**
4.76
-1.54
-11.30
3.47
Notes of Explanation: Assets=Net Assets in millions. Blank cells=fund was not in operation during entire interval. *Average returns exclude the Vanguard Treasury Money Market Fund Investor. **Average returns exclude the S&P 500 Index to avoid double counting. Sources: Morningstar Direct and MSCI.
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