The top holdings of many ESG funds may be surprisingly familiar.
Arne Nowak of DWS Group explained that while these strategies take into account a company's ESG factors, these funds still aim to invest in top performers across industry groups.
“The idea is not to get too focused and pick just a few stocks that do the best from ESG or climate principles, but [to] You still have a portfolio that looks very similar to 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 manages the Xtrackers MSCI USA Climate Action (USCA) Equity Fund. It includes its most important holdings Nvidia, amazon, Microsoft, apple, Meta platforms The parent company of Google the alphabet – Six of the “Magnificent Seven” technology stocks also lead the ETFs that track the S&P 500.
ESG funds also tend to invest more in technology stocks because the sector is one of the “clean” industries, according to Dave Nadig, a former financial futurist at VettaFi.
“If you just look at climate as your window, you're probably not going to end up not owning a lot of energy companies, or not owning a lot of miners [and] “I don't own a lot of steel companies,” Nadig said. “So you end up with something that looks like services,” Nadig said. health care And technology“It's a very strong bet.”
IT stocks currently account for more than 30% of USCA allocations, according to the Xtracker website. That's more than double the fund's second-largest sector allocation — 13.5% in health care.
But Nowak considers the idea that ESG funds only invest in clean and sustainable sectors to be misleading
He said: “Sometimes there is a misperception that ESG funds cannot invest in energy companies. This is completely wrong. Energy is a vital component of our economy.”
Are Environmental, Social and Governance (ESG) standards still relevant?
Global ESG funds saw their first-ever net quarterly outflows in the fourth quarter of 2023, according to Morningstar. However, Nadig points out that although financial advisors have backed away from recommending ESG funds to clients, investor interest has not gone anywhere.
“[Advisors] pulled back. They probably won't come back. “But the demand from individuals has never diminished,” Nadig said. “What's gone is the hot money of people who thought this was going to be some kind of momentum play. It's not a momentum play. This is a long-term way to handle your allocations.”
The Xtrackers MSCI USA Climate Action Equity ETF is up nearly 9% so far this year.
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