The Bottom Line: Three new ETFs listed in June 2022 seeking to reduce greenhouse gas emissions should be evaluated based on financial and non-financial outcomes.
Sustainable ETFs listed in June 2022 that invest in companies seeking to reduce CO2 emissions
Note of Explanation: ER=Expense ratio. Data sources: Fund prospectus, Sustainable Research and Analysis LLC.
Observations:
- Six new sustainable funds with total net assets of $73.1 million were launched in June 2022¹, including one municipal bond fund introduced by Fidelity Investments and five new ETFs.
- Of the six new sustainable mutual funds and ETFs, three new funds, all ETFs, offer investors additional stock-oriented opportunities to invest in companies that are either leading in the transition to low carbon emissions, are expected to have a positive impact on the carbon economy or are aligned with the long-term global warming target of the Paris Climate Agreement to reduce global warming to well below 2℃ compared to pre-industrial levels.
- Two ETFs are index tracking funds offered at expense ratios ranging from 10 bps to 39 bps that employ detailed positive and exclusionary screening rules the results of which will only be clarified over time as the indices are newly launched and historical results are calculated via back-testing. While back-tested results show positive intermediate-term spreads, that’s not the case more recently. Short-term year-to-date total returns relative to tracking indices are lagging in both cases. The third fund, an actively managed ETF offered at an expense ratio of 55 bps, is yet to establish a performance track record.
- In addition to evaluating climate outcomes by means of disclosures that should be provided by fund firms (and mandated for ESG Impact Funds by recently proposed SEC disclosure requirements, once these are adopted), investors should evaluate fund results relative to the underlying index, in the case of index tracking funds, and also against the performance of an appropriately selected conventional benchmark². In the meantime, DWS reports in its prospectus that the fund “does not intend to report retrospectively if the portfolio, as selected at each prior rebalance, met the carbon intensity reduction targets.”
¹Excluding new/additional share class additions. ²Conventional benchmarks for each of the index tracking funds are: UDI-MSCI World Index, and USNZ-Solactive GBS Unites States Large and Mid-Cap Index or equivalent. A conventional index candidate for the actively managed NTZG is the MSCI All Country World Index.
