Summary List Placement
With Joe Biden pushing for a mammoth infrastructure package as well as his clean energy initiatives taken through executive orders, ESG and infrastructure ETFs offer promising opportunities for investors looking to dip their toes in these growing themes, says Chris Hummer, a senior investment strategist at FlexShares.
ESG investing has been gaining traction for years now, but the pandemic and new administration have pushed the popularity of environmental, social, and corporate governance criteria through the roof.
Within his first month in office, Joe Biden signed climate change executive orders, rejoined the Paris Agreement, and nominated ESG investment allies like Marty Walsh for higher-ranking government positions.
As for infrastructure, the pandemic has highlighted our need for cell phone towers, data centers and fiber optic cables. The recent power shortage in Texas this week also helps shine a light on how dependent we are on these types of infrastructures.
“From infrastructure, we are seeing more people looking at this as a distinct asset class. We have been an advocate for years now, and it has paid off in our own asset allocation models.” Hummer told Insider.
He highlighted that energy infrastructure, just like transportation and electricity are, in fact, key components of the infrastructure complex, but there is much more to it today. He argued that communication technology has been just as mission critical as water, waste management and energy utilities this past year, given the structural shifts brought about by the pandemic.
3 mistakes to avoid when choosing investment vehicles
The first is to avoid looking at infrastructure ETFs that focus on just one sector because those don’t gain the benefits of having broad exposure. Concentration in one area like transportation and energy might leave investors out of opportunities provided by the whole complex.
“If you have a real asset bucket, it should be part of that real asset, if you don’t it should be part of your equity allocation,” he said.
The iShares US Infrastructure ETF, for example, tracks a diverse array of companies from builders and railroad providers to water utility companies.
Similar to the infrastructure space, the second mistake to avoid when selecting an ESG ETF is constricted exposure as well as not finding a way to focus on best-in-class ESG companies across all sectors. An investor should aim for broad exposure across sectors, and ensure that any chosen ETF is aligned with their goals. One of the easiest ways to implement the criteria is to look at one’s core equity exposure.
For example, the approach that Hummer’s team takes on ESG involves what he calls integration and best in class.
That consists of integrating ESG principles into financial analysis while focusing on large-weight companies that are, from an ESG perspective, the best of the top 50% names in each sector. By doing that, one gets “good core equity exposure,” as ESG principles are front and center of the investing process without a large tracking error (or without deviating too much from the benchmark).
One starting point to consider is the iShares ESG MSCI USA Leaders ETF, which seeks out large- and mid-cap US stocks that are leading on ESG practices within their industries.
The third is to steer clear of wrongly thinking that one needs to position themselves to underperform if they want to focus on ESG. However that has been empirically proven to be false as these types of funds continue to do well, he said.
For example, an October Global Financial Stability Report released by the IMF in 2019 found that the performance of sustainable funds was comparable to their conventional equity fund peers.
Furthermore, even some ESG-focused funds returned as much as to trounce the S&P 500 in 2019, including names like First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund and Nuveen ESG Large-Cap Growth ETF, which were up 40.4% and 39.7% respectively at the end of the year.
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