Update

Sustainable Equity Funds continue to hold up in bear market

ESG Funds overrepresented in top halves of peer groups; ESG index funds outperforming conventional index funds

Jon Hale
Jon Hale
Mar 13 · 5 min read

Sustainable equity funds weathered the initial stages of the downturn, on average, better than conventional funds, as I reported here and here. With global markets now in bear-market territory for the first time in more than a decade, here is an update through Thursday, March 12. The takeaway: Sustainable equity funds continue their outperformance on a relative basis.

Peer Groups Comparison

I compared the trailing one-month and year-to-date returns of all 203 sustainable equity open-end and exchange-traded funds available in the U.S. with those of their respective peer groups. For peer groups, I used Morningstar categories, which group similar funds based on portfolio characteristics like region, market cap, and style. Categories contain funds with sustainable mandates as well as conventional funds, which make up the bulk of each peer group.

The trailing one-month period begins a week before the downturn began on February 20, but Morningstar calculates category percentile rankings for funds using that time period, so it is the closest match for the Feb. 20-Mar. 12 market decline.

Over the past month, the returns of 66% of sustainable equity funds ranked in the top halves of their respective Morningstar categories. More than a third, 39%, ranked in their category’s best quartile while only 11% ranked in their category’s worst quartile. That means sustainable funds are overrepresented in the top quartiles and top halves of their peer groups, because, by definition, 25% of all funds in each category place in each of four quartiles.

Broadening the perspective to this year through March 12, the relative outperformance of sustainable equity funds is even better. The returns of 69% of sustainable equity funds ranked in top halves of their respective categories. The returns of 42% ranked in their category’s top quartile while only 12% landed in their category’s worst quartile.

Index Funds Comparison

I also compared the returns of 26 ESG index funds with those of conventional index funds covering U.S. stocks, non-US developed-market stocks, and emerging-markets stocks. Over the last month, 24 of the 26 outperformed conventional index funds, and all 26 have outperformed for the year to date through March 12.

U.S. Ten of the 12 passive ESG funds found in the Morningstar Large Blend category lost less than iShares Core S&P 500 ETF (IVV) for the month ending Mar. 12. While IVV lost 26.44%, the average ESG passive fund return was -26.1%. For the year through March 12, all 12 ESG index funds are outperforming IVV. Their average return of -21.92 is a full percentage point better than that of IVV.

These returns are net of expenses and thus take into account the higher expense ratios of the ESG funds. IVV has an ultralow expense ratio of 0.04% while the expense ratios of the dozen ESG passive funds range from 0.10% to 0.25%, and average 0.16%.

The top performing ESG fund for both the past month and the year to date is IQ Candriam ESG US Equity ETF, based on a proprietary index developed for Index IQ by European sustainable asset manager, Candriam.

Developed Markets ex-U.S. The story is even better for ESG indexes focused outside of the U.S. All 11 passive ESG funds in the Morningstar Foreign Large Blend category outperformed iShares Core MSCI EAFE ETF (IEFA) for the month ending Mar. 12. While IEFA lost 26.81%, the average ESG passive fund return was -25.93%. And, for the year through March 12, all 11 ESG index funds are outperforming IEFA. Their average return of -25.31% is well ahead of IEFA’s -26.73% return.

As with the comparisons of U.S. funds, these returns are net of expenses and thus take into account the higher expense ratios of the ESG funds. IEFA has an expense ratio of 0.08% while the expense ratios of 11 ESG passive funds range from 0.14% to 0.98%, and average 0.34%. Five funds have expense ratios between 0.14% and 0.20%.

The top performing passive international ESG fund for both the past month and the year to date is Xtrackers MSCI ACWI ex USA ESG Leaders Equity ETF (ACSG).

Emerging Markets. The three emerging markets ESG index funds outperformed iShares Core MSCI Emerging Markets ETF (IEMG) over both periods. They posted an average return of -19.56 for the month ending March 12, nearly a percentage point better than IEMG’s return. For the year to date, the three ESG funds outperformed IEMG by 1.37 percentage points. The ESG funds also had to overcome higher expenses (0.20%, 0.25%, and 0.40% compared with IEMG’s 0.14%).

Most of the growth of sustainable investing has taken place since the global financial crisis, much of it in the past five years. Although sustainable funds have performed well relative to their conventional peers over that time, many investors have adopted a wait-and-see approach to see how these funds would fare during market turmoil.

To be sure, sustainable equity funds have taken big hits during the past month, but they have been smaller than those of their conventional peers. Because so many sustainable funds are less than 10 years old — many of them not even 5 years old — this is their first test in a down market. It’s one that most sustainable funds have passed pretty well.

Download the Sustainable Funds U.S. Landscape Report.

Download Proxy Voting By 50 U.S. Fund Families.

Follow me on twitter: @Jon_F_Hale

Jon Hale

Written by

Jon Hale

Global Head, Sustainable Investing Research, Morningstar. Views expressed here may not reflect those of Morningstar Research Services LLC. or its affilliates.

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