The popularity of ESG investing may grow.
President-elect Joe Biden ran on one of the most environmentally friendly platforms in the Democratic presidential primaries, including plans to rejoin the Paris Agreement on climate change and increase renewable energy output. Environmental, social and corporate governance investing was already growing in popularity well before Biden’s election, and this trend may accelerate under an administration that supports ESG goals. Kenneth Van Leeuwen, founder and managing director of Van Leeuwen & Company, says even if the U.S. Senate stays in Republican hands, he expects Biden’s policies to remain “green leaning.” Here are seven ESG exchange-traded funds to consider buying under a Biden administration.
Invesco Solar ETF (ticker: TAN)
ETFs that focus on renewable energy already saw a strong run up in 2021. Todd Rosenbluth, senior director of ETF and mutual fund research for CFRA, expects that to continue. Solar energy companies are well suited to take advantage of this momentum, and TAN is focused directly on that industry with its mix of technology and semiconductor equipment firms and utilities such as SolarEdge Technologies (SEDG). TAN more than doubled in price in 2020, but the fund could rise further. The ETF charges an above-average annual fee of 0.69%, or $69 for every $10,000 invested, but Rosenbluth explains that “there really isn’t anything like it.” TAN has more than $3 billion in assets under management and he says its liquidity is strong.
iShares Global Clean Energy ETF (ICLN)
ICLN gives investors diversification at both the geographic and sector level, Rosenbluth says, and includes companies in both the wind and solar energy industries. The fund contains a mix of industrial and technology companies — such as Plug Power (PLUG) and First Solar (FSLR) — along with electric utilities and independent power producers. ICLN’s geographic breakdown is nearly a third in the U.S., but it also includes companies based in China, New Zealand, Spain and Canada. Like other renewable energy ETFs, ICLN has seen robust performance, with a nearly 140% return in 2020, and Rosenbluth expects strong growth to continue. The fund comes with an expense ratio of 0.46%.
ALPS Clean Energy ETF (ACES)
ACES gives investors exposure to clean energy companies such as SunPower Corp. (SPWR), but it also holds electric vehicle maker Tesla (TSLA). “If there is renewed confidence in alternative energy, then you know Tesla is obviously a beneficiary of that,” Rosenbluth says. The fund has 82% of the portfolio invested in the U.S., with the rest in Canadian companies. ACES is a newer ETF, having debuted in 2018, but it already has more than $750 million in assets under management. The fund balances holdings involved in both renewable energy sources and the broader clean technology spaces, including electric vehicles and smart grids. It has an expense ratio of 0.65%.
iShares ESG Aware MSCI USA ETF (ESGU)
Investor demand for broadly diversified ESG ETFs grew in 2020, and Rosenbluth says he expects that to continue in 2021. “If climate change is a priority and governance is a priority by the Biden administration, then it’s likely that some investors will follow suit,” he says. This iShares fund includes both Apple (AAPL) and Microsoft Corp. (MSFT) among its top holdings, which are considered strong corporate citizens from an ESG perspective, although he points out that those companies’ investment merit isn’t necessarily driven by ESG revenue growth. Still, the fund ranks in the 86th percentile within its peer group of funds covered by MSCI ESG fund ratings. ESGU has a low expense ratio of 0.15%.
Xtrackers S&P 500 ESG ETF (SNPE)
Daniel Milan, managing partner at Cornerstone Financial Services, likes SNPE for how well it mirrors the S&P 500. SNPE uses an exclusionary screen to keep out tobacco firms and controversial weapons makers, those which score low on the United Nations Global Compact ranking or companies in the bottom 25% of ESG ratings within their industry. From there, companies are chosen by their ESG score and are weighted by their place in the S&P 500. “If someone’s looking for just a pure S&P 500, exclusionary ESG fund, this has, in our opinion, the strongest methodology standpoint,” Milan says. Even though SNPE excludes some S&P 500 names, its return is in line with the broader index. “It’s a good sign the methodology is working,” he adds. The annual fee for this fund is also low at 0.1%.
First Trust Water ETF (FIW)
Milan says that although FIW doesn’t have ESG in its name, for people interested in the water sector, this is his choice. The fund holds 36 of the largest water companies in the U.S., Canada and Brazil ranked by market cap and weighted equally within five tiers. Top holdings include Idexx Laboratories (IDXX) and Advanced Drainage Systems (WMS). Originally, Milan selected FIW as an alternative to a utilities sector fund, but the focus on clean water will only grow in coming years. “There’s plenty of research regarding the value of water in the coming years, and this fund includes everything from upline to downline to last mile delivery of water,” he says, noting that he is “very bullish” on water. FIW has an expense ratio of 0.55%.
SPDR SSGA Gender Diversity Index ETF (SHE)
Van Leeuwen says Biden plans to improve diversity in his Cabinet with some of his recent picks, including Janet Yellen for Secretary of the Treasury. He says Biden’s choice of Yellen is good “for people of all income levels,” too, given her focus on income inequality when she was the first female chair of the Federal Reserve. There may be more focus on gender diversity, especially with Nasdaq’s push to enforce gender diversity in corporate boardrooms for the companies that are listed on its exchange. Van Leeuwen says SHE seeks out companies that employ women in high-level leadership roles. Top holdings include PayPal Holdings (PYPL) and Netflix (NFLX). The fund has an expense ratio of 0.2%.
Seven ESG funds to buy under a Biden administration:
— Invesco Solar ETF (TAN)
— iShares Global Clean Energy ETF (ICLN)
— ALPS Clean Energy ETF (ACES)
— iShares ESG Aware MSCI USA ETF (ESGU)
— Xtrackers S&P 500 ESG ETF (SNPE)
— First Trust Water ETF (FIW)
— SPDR SSGA Gender Diversity Index ETF (SHE)
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