What Are ESG (Environmental, Social and Governance) ETFs? - InvestingChannel

What Are ESG (Environmental, Social and Governance) ETFs?

Proprietary Data Insights

Top Solar Energy Stock Searches This Month

#1FSLRFirst Solar22,283
#2SEDGSolaredge Technologies9,732
#4CSIQCanadian Solar6,109
#5JKSJinkoSolar Holding Co5,874
#ad Solar power boom creates investment opportunity

What Are ESG ETFs?

Today, we dig deeper into Trackstar today to explain what ESG exchange-traded funds (ETFs) are. 

As we noted in Wednesday’s Juice, there’s often a time and place to take an alternative path in your portfolio via ETF investing. That might mean buying an active ETF, a thematic ETF (which is basically a type of active ETF) or a passive ETF that tracks a more specific index. By the end of this Juice, you’ll know exactly what we mean by all of the above. 

What is an ESG ETF?

ESG stands for environmental, social and governance. The term is a bit broad. But, in the shell of a nut, it refers to a fund that typically excludes investments in areas such as tobacco, alcohol, weapons, and gambling. ESG funds focus on values and “impact” areas, ranging from specific causes such as climate change to broader areas such as only buying companies with a strong track record of above-board corporate governance (i.e., clean accounting). 

Often, an ESG ETF is simply a fund that invests in broad alternative energy spaces, such as solar energy. 

To illustrate, scroll back up to today’s Trackstar top five. The names that populate the list are the solar energy stocks generating the most search interest among investors across the platforms of our 100+ financial media partners. 

We can dig deeper into Trackstar and find ETF categories. One of them is labeled Alternative Energy Equities. The five most searched ETFs in that classification are:

  1. Invesco Solar ETF (TAN): 2,979 searches
  2. iShares Global Clean Energy ETF (QCLN): 1,087 searches
  3. First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund (GRID): 457 searches
  4. VanEck Vectors Uranium+Nuclear Energy ETF (NLR): 424 searches
  5. ALPS Clean Energy ETF (ACES): 339 searches

Partially because we love the ticker symbol, but also because it’s the best introductory illustration of ESG ETFs, let’s consider the Invesco Solar ETF.

TAN is a passively-managed ETF that tracks a Bloomberg index of solar stocks. It has an industry-average expense ratio of 0.67% (which, when compared to low-cost, broad market index funds, is kind of high). 

TAN’s top holding is First Solar (FSLR). The #1 stock in today’s Trackstar top five, it makes up about 10% of the ETF’s portfolio. The fifth biggest position, at approximately 5.2%, is Solaredge Technologies (SEDG), which is the second most searched solar energy stock. 

So, you get the picture. 

If the alternative path you’d like to take in your portfolio follows a conviction or if you just think solar energy is a good investment, a passive approach with an ETF such as TAN can make sense. Just realize there’s going to be some volatility. TAN is up roughly 95% over the last five years, but off 38% over the last year. 

With a lower 0.47% expense ratio, the iShares Global Clean Energy ETF takes a broader approach geographically and sector-wise, expanding into areas beyond solar. FSLR is still the fund’s top holding and SEDG shows up in the top ten, but you’ll also find a healthy number of solar and other utility/power companies, based in countries such as Canada and China. QCLN’s performance over one- and five-year periods is similar to TAN’s. 

As with many ETFs with specific focus areas, even passive products, beware of the ones that get too cute. Maybe they play fast and loose with an index, tracking it based on hand-picked quantitative criteria or they lack actual focus, trying to be all things to all people. 

We warned about the latter in Should You Invest In The Hottest Thematic ETFs?

The ETF world is as much about marketing as anything else. Themes such as Equality, Inclusion & Diversity attract people with an affinity for the cause. Or whatever they perceive to be the cause. All fine and good, but if you’re going to buy the same or a similar slate of stocks in SPY or QQQ as SHE, why get too cute?

SHE refers to the SPDR MSCI USA Gender Diversity ETF (SHE). As we noted in the above-linked Juice, SHE holds a wide assortment of market leaders so why not just buy SPY or QQQ?


The Bottom Line: Here again, there’s a time, place and “right” way to do everything. In our humble eyes, buying SHE just to make a statement doesn’t make much sense. You’re better off in SPY or QQQ.

However, if you have a thing for solar energy — which we think can make a ton of sense as a long-term play — TAN and other ETFs clearly focused on space and, preferably, tracking an index of solar stocks is one of several paths to consider.

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