‘They’re making this a battle’: ESG is a slice of ETF industry that’s under fire

Table of Contents1 Battle over ESG?2 The good…3 …and the bad4 New ETFs5 Weekly ETF reads Hello! For this week’s ETF Wrap I spoke with Todd Rosenbluth, head of research at VettaFi, about the battle he sees forming around ESG. Please send feedback and tips to christine.idzelis@marketwatch.com. You can also […]

Hello! For this week’s ETF Wrap I spoke with Todd Rosenbluth, head of research at VettaFi, about the battle he sees forming around ESG.

Please send feedback and tips to christine.idzelis@marketwatch.com. You can also follow me on Twitter at @cidzelis and find me on LinkedIn.

Environmental, social and governance criteria seem to be getting on some people’s nerves lately, although ESG funds represent just a tiny slice of assets in the U.S.-listed exchange-traded-fund market, according to Todd Rosenbluth, head of research at VettaFi,

“ESG has become the villain for many people who are using it as a way of speaking to their narrative,” Rosenbluth said in a phone interview. It’s not just politicians in states such as Florida or Texas pushing back on ESG, “we’ve seen asset managers like Strive take a more investment-focused stand,” he said.

Strive Asset Management, which last month launched the Strive U.S. Energy ETF
DRLL,
announced Sept. 6 that it sent a letter to Chevron Corp.
CVX
urging the oil and gas producer to “liberate itself from constraints imposed by its ESG-promoting ‘shareholders’ and to focus exclusively on maximizing long run value for the company’s ultimate owners.” 

Strive, which recently became a Chevron shareholder, wrote the letter on behalf of its clients to “deliver what we term a ‘post-ESG’ shareholder mandate,” according to the announcement. Strive Executive Chairman Vivek Ramaswamy addressed the letter to Chevron chairman and chief executive officer Michael Wirth, saying Chevron should “produce and distribute more fuel to customers around the world – proudly, publicly, and without apology.”

Read: Kremlin says sanctions to blame for halting natural gas supply to Europe

Ramaswamy wrote “we are concerned that Chevron faces immense pressure from its large institutional “shareholders” including BlackRock, State Street, and Vanguard to adopt value-destroying limitations on its business that do not align with Chevron’s best interests.”

BlackRock, State Street and Vanguard Group are giant asset managers whose offerings to investors include ESG funds. But ESG represents “a very small slice” of the exchange-traded-fund market at about 1.5%, according to Rosenbluth.

BlackRock has pushed back on claims that it is putting its “climate agenda” ahead of clients, the New York Times reported Thursday, citing a letter that the asset management giant sent to attorneys general in 19 states.

ESG funds go beyond climate change concerns and “they serve a great purpose for many investors,” said Rosenbluth. They aren’t just about the environment, or the “e” in the acronym. The “s” and the “g” pillars are linked to areas such as labor management, a diverse workforce and product safety, he said.

Investors in ESG-focused funds may get “broad market exposure tilted toward companies that are relatively strong across multiple metrics,” said Rosenbluth.

Read: Opinion: Ron DeSantis ramps up attack on ‘woke capital’ with ESG crackdown

Check out: Learn how to incorporate ESG into your investment portfolio. Join Jennifer Grancio, CEO of Engine No. 1, at the Best New Ideas in Money Festival on Sept. 21 and Sept. 22 in New York.

Battle over ESG?

BlackRock’s iShares ESG Aware MSCI USA ETF
ESGU
and the Vanguard ESG U.S. Stock ETF
ESGV
rank among the biggest ESG ETFs, according to a research report from Strategas at the end of August.

The iShares ESG Aware MSCI USA ETF, with about $22 billion of assets under management as recently as Sept. 6, invests in large and mid-cap companies with “strong ESG traits,” FactSet data show. The Vanguard ESG U.S. Stock ETF, with almost $6 billion of assets on that same date, offers “an ESG slant” on U.S. stocks of all market capitalizations, according to FactSet data.

ESG ETFs tend to have holdings that are “extremely” similar to the S&P 500, the Strategas report shows. The SPDR S&P 500 ETF Trust
SPY,
which tracks the S&P 500 index and has around $360 billion of assets, held Chevron shares as of Sept. 7, as did BlackRock’s iShares ESG Aware MSCI USA ETF, holdings data from the funds’ webpages show. 

Meanwhile, oil prices were trading higher Thursday afternoon, with West Texas Intermediate crude for October delivery
CLV22
up 1.9% at $83.50 a barrel. That’s after settling Wednesday at the lowest level since January, amid fears of a global economic slowdown and Russia’s threats to walk away from energy contracts. 

Read: Oil prices settle at their lowest since January on fresh concerns over a slowdown in energy demand

ESG is “serving as a stand-in for people who are looking for something to rail against,” said Rosenbluth. “They’re making this a battle” 

But in his view, there needn’t be one. 

People may choose to invest with an ESG focus, he said, “or they can do what most people are doing, which is ignoring these products and buying traditional market-cap weighted” ETFs tied to indexes such as the S&P 500.

As usual, here’s your look at the top and bottom performing ETFs over the past week through Wednesday, according to FactSet data. 

The good…
Top Performers %Performance
Utilities Select Sector SPDR Fund
XLU
3.8
Invesco Solar ETF
TAN
3.7
iShares U.S. Utilities ETF
IDU
3.5
Fidelity MSCI Utilities Index ETF
FUTY
3.5
Vanguard Utilities ETF
VPU
3.5
Source: FactSet data through Wednesday, Sept. 7, excluding ETNs and leveraged products. Includes NYSE, Nasdaq and Cboe traded ETFs of $500 million or greater.
…and the bad
Bottom Performers %Performance
United States Natural Gas Fund LP
UNG
-14.7
KraneShares Global Carbon Strategy ETF
KRBN
-9.3
United States Oil Fund LP
USO
-7.5
KraneShares CSI China Internet ETF
KWEB
-5.4
AdvisorShares Pure US Cannabis ETF
MSOS
-5.1
Source: FactSet
New ETFs
  • Emerge Capital Management announced Sept. 7 a new program under which it is launching five new sustainable ETFs run by women with “a strong track record in the investment industry.” Lisa Langley, chief executive officer of Emerge Capital, said in the announcement that the firm is “launching EMPWR to support and advocate for woman managers and to inspire new women portfolio managers to join the industry.” She said that “it is no secret that representation of women in the investment management industry is a fraction of what it can and should be.”
  • Single-stock ETFs keep coming. Direxion announced Sept. 7 that it launched six single-stock ETFs so active traders may seek to either magnify their exposure to Amazon.com Inc.
    AMZN,
    Google parent Alphabet Inc.
    GOOGL
    and Microsoft Corp.
    MSFT,
    or get the inverse performance of their shares. 
  • Defiance announced Thursday that it launched the Defiance Daily Short Digitizing the Economy ETF (IBIT) to bet against positions of the Amplify Transformational Data Sharing ETF
    BLOK,
    an actively managed fund offering exposure to companies in the crypto and blockchain ecosystem.
Weekly ETF reads

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