Close Close
Sign In
Newsletters
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards
Podcast Center Video Center Webcasts Resource Center Events
About ThinkAdvisor Contact Us Advertise With Us Asset & Logo Licensing Sitemap Terms of Service Privacy Policy Copyright © 2024 ALM Global, LLC. All Rights Reserved.
ThinkAdvisor
ETF letters and stock charts

Portfolio > ETFs

Wall Street's ESG Backlash Spurs Jump in ETF Closures

By Isabelle Lee

X
Your article was successfully shared with the contacts you provided.

Interest in sustainable investing has taken a back seat in the past year after the environmental, social and governance strategy found itself enmeshed in a viscous political storm.

The dwindling demand is evident in the Americas from the slowdown in sales of new exchange-traded funds and the pickup in fund closures and outflows, according to Shaheen Contractor, senior ESG strategist at Bloomberg Intelligence.

In 2023, the region saw just 48 new ETFs introduced, down from 104 in 2022 and 125 in 2021, data compiled by Bloomberg Intelligence show.

“ESG ETF launches will likely keep slowing as political turmoil and changing regulations cause asset managers to pause,” Contractor wrote in a research note.

A net $4.3 billion was pulled last year from ESG-focused ETFs in the U.S., marking the first-ever annual outflows.

The $13 billion iShares ESG Aware MSCI USA ETF (ticker ESGU), the largest ESG-focused ETF, is seeing continued outflows this year, with $809 million yanked from the fund after a $9 billion exodus last year.

Meanwhile, 36 ESG-labeled ETFs were liquidated in the Americas during 2023, more than double the prior year, data from Bloomberg Intelligence show.

Almost 60% of the funds that were closed were actively managed.

The ESG Backlash on Wall Street Spurs a Jump in ETF Closures

The trend may worsen this year “if the U.S. backlash against the strategy dims money managers’ expectations for inflows,” Contractor said.

During the second half of last year, investment firms focused on marketing more thematic types of funds such as climate-transition offerings, a trend that may continue, she added.

While index-tracking funds still account for almost 90% of ESG-focused ETF assets in the Americas, industry giants including Goldman Sachs Group Inc, BlackRock Inc., Fidelity Investments and JPMorgan Chase & Co are among those with active funds.

Median fees for active strategies, however, are almost 70% higher than those for their passive peers, BI data show.

“The main issue I have had with ESG is that the products are extremely similar in exposure to vanilla, passive indices,” said Todd Sohn, ETF and technical strategist at Strategas Securities. “In some cases, you are paying multiples more in fees.”

Apart from attempts to differentiate their products and justify hefty expense ratios, fund managers also have resorted to rebranding their ESG-related products to avoid those who decry “woke capitalism.”

The new funds and those that have been rebranded have undergone more careful review given the scrutiny in the past, said Mohit Bajaj, director of ETFs at WallachBeth Capital. For instance, “funds are increasing their screening metrics for companies that they hold,” he said.

 

Copyright 2024 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.