The top holdings of many ESG funds may be surprisingly familiar.
While these strategies consider a company’s environmental, social and governance factors, these funds still aim to invest in top performers across industry groups, DWS Group’s Arne Noack explained.
“The idea isn’t to be super concentrated and only select a handful of stocks that do the best from an ESG or from a climate principle, but [to] still have a portfolio that largely resembles the economic makeup of the US economy,” the firm’s head of systematic investment solutions for the Americas told CNBC’s “ETF Edge” earlier this week.
Noack’s firm manages the Xtrackers MSCI USA Climate Action Equity ETF (USCA). Its top holdings include Nvidia, Amazon, Microsoft, Apple, Meta Platforms and Google’s parent company Alphabet — six of the “Magnificent Seven” mega-cap tech stocks that also lead ETFs that track the S&P 500.
ESG funds also tend to be more heavily invested in technology stocks because the sector is one of the “cleaner” industries, according to former VettaFi financial futurist Dave Nadig.
“If you solely look at climate as your window, you’ll probably not end up not owning a lot of energy companies, not owning a lot of miners [and] not owning a lot of steel companies,” Nadig said. “So, you end up with something that looks like services, health care and technology, which is a very strong bet to take.”
Information technology stocks currently account for more than 30% of USCA’s allocation, according to Xtracker’s website. That’s more than double the fund’s second largest sector allocation — 13.5% in health care.
But Noack considers the idea that ESG funds only invest in clean, sustainable sectors as misleading.
“There’s sometimes a misperception that ESG funds cannot invest in energy companies. That’s absolutely wrong. Energy is a vital component of our economy,” he said.
Is ESG still relevant?
Global ESG funds saw their first net quarterly outflows on record in the fourth quarter of 2023, according to Morningstar. However, Nadig points out while financial advisors may have pulled back from recommending ESG funds to clients, investor interest hasn’t gone anywhere.
“[Advisors] pulled back. They probably aren’t coming back. The demand from individuals, however, never really waned,” Nadig said. “What went away was the hot money of people thinking this was going to be a momentum kind of play. It’s not a momentum play. This is a long-term way of approaching your allocation.”
The Xtrackers MSCI USA Climate Action Equity ETF is up nearly 9% so far this year.