Closures of ESG ETFs pick up amid political backlash

Closures of ESG ETFs pick up amid political backlash
Thirty-six sustainable ETFs were liquidated in the Americas last year, more than double the prior year.
FEB 15, 2024
By  Bloomberg

Interest in sustainable investing has taken a back seat in the past year after the the environmental, social and governance strategy found itself enmeshed in a 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 US, marking the first-ever annual outflows. The $13 billion iShares ESG Aware MSCI USA ETF (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 trend may worsen this year “if the US 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.

Here's why tech, health care stocks will lead market higher again in 2024

Latest News

Roughly three-fifths of Americans agree on higher taxes for large corporations, higher-income households
Roughly three-fifths of Americans agree on higher taxes for large corporations, higher-income households

Pew survey reveals slight majority consensus on tax rates, but views splinter based on political alignment and income levels.

The Fed's going to cut rates
The Fed's going to cut rates

While the Federal Reserve's decision to hold interest rates steady in March was widely expected, it's the reactions from financial professionals that provide a more nuanced picture of the central bank's approach.

Ontario Pension Fund revamps PE business in light of global risk
Ontario Pension Fund revamps PE business in light of global risk

The pioneering member of Canada's Maple Eight is stepping back from its go-it-alone private equity approach as a drought in deals and Trump's trade war prompt a rethink.

Raymond James, RBC reel in UBS advisors managing over $690M in assets
Raymond James, RBC reel in UBS advisors managing over $690M in assets

The firms' latest additions in Florida and Nevada come as a strategic change at UBS raises risk of advisor defections.

Assetmark debuts new advisor succession planning program
Assetmark debuts new advisor succession planning program

The new program offers opportunities and events structured for rookies, next-gen advisor leaders, and soon-to-exit veterans.

SPONSORED Beyond the all-in-one: Why specialization is key in wealth tech

In an industry of broad solutions, firms like intelliflo prove 'you just need tools that play well together'

SPONSORED Record growth: Interval funds emerge as key players in alternative investments

Blue Vault Alts Summit highlights the role of liquidity-focused funds in reshaping advisor strategies