The top holdings of many ESG funds may look surprisingly familiar.
While these strategies consider a company's environmental, social and governance factors, these funds still aim to invest in high-performing companies across all industry groups, explained Arne Noack of the DWS Group.
“The idea is not to be super focused and select just a handful of stocks that do the best from an ESG or climate principle, but [to] “We still have a portfolio that largely resembles the economic makeup of the U.S. economy,” the firm's head of systematic investment solutions for the Americas told CNBC's “ETF Edge” earlier this week.
Noack's firm manages the Xtrackers MSCI USA Climate Action Equity (USCA) ETF. Its main holdings include NVIDIA, Amazon, microsoft, Apple, Metaplatforms and the parent company of Google Alphabet – six of the “Magnificent Seven” mega-cap tech stocks that also lead the ETFs that track the S&P 500.
ESG funds also tend to invest more in tech stocks because the sector is one of the “cleanest” industries, according to former VettaFi financial futurist Dave Nadig.
“If you look only at the weather as your window, you probably won't end up owning a lot of energy companies, or a lot of mining companies.” [and] many steel companies,” Nadig said. “So, you end up with something that looks like services, health care and technologywhich is a very strong bet.”
Information technology stocks currently account for more than 30% of USCA's allocation, according to the Xtracker website. That's more than double the fund's second-largest sector allocation: 13.5% to healthcare.
But Noack finds the idea that ESG funds only invest in clean and sustainable sectors misleading.
“There is sometimes a misconception that ESG funds cannot invest in energy companies. That is absolutely wrong. Energy is a vital component of our economy,” he said.
Is ESG still relevant?
Global ESG funds posted their first quarterly net outflows on record in the fourth quarter of 2023, according to Morningstar. However, Nadig notes that while financial advisors may have stopped recommending ESG funds to clients, investor interest has not disappeared.
“[Advisors] retired. They probably won't come back. Demand from individuals, however, never really diminished,” Nadig said. “What disappeared was the hot money from people who thought this was going to be some kind of momentum game. It's not an impulse play. “This is a long-term way to approach your assignment.”
The Xtrackers MSCI USA Climate Action Equity ETF is up almost 9% so far this year.
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