It Is Still Not Easy Being Green for Exchange-Traded Funds

Abstract

An earlier foray into the performance of environmental, social, and governance exchange-traded funds depicted extremely low risk-adjusted returns achieved at the cost of considerable additional systematic risk. This updated analysis of environmental, social, and governance exchange-traded funds indicates that they are finally beginning to show improvement in their performance. Their risk-adjusted performance is palpably better, and their contribution to systematic risk, less perceptible. They are also doing better in terms of alpha, although in some cases the alpha contribution is neither high nor dependable. Altogether, although this moderately improved market picture could be adequate for most individuals who want to invest with their conscience, it remains unclear whether it is enough to generate a meaningful commitment from those who, under the Employee Retirement Income Security Act, are mandated to act in the best financial interests of 401(k) plan participants. <b>TOPICS:</b>Exchange-traded funds and applications, ESG investing, mutual fund performance <b>Key Findings</b> • ESG ETFs are now competitively priced and should no longer be considered a product for which investors pay a premium. Yet, their market continues to be highly concentrated, and its footprint remains trivial in relation to the overall ETF market. • ESG ETFs have measurably improved in terms of their contribution to systematic risk (beta) and the excess return they bring above and beyond the SPY (alpha), the fund against which their performance was evaluated. • ESG ETFs show modest returns, lagging behind the SPY, so it remains to be seen whether this is enough to generate a meaningful commitment from those with a fiduciary responsibility to invest in the best financial interests of their plan participants.