Exchange-traded funds dedicated to so-called environmentally friendly strategies and sectors have seen a surge of adoption under President Donald Trump, as investors look to offset an administration that isn’t viewed as supporting policies favorable to sustaining the Earth.
While alternative-energy sectors have long been viewed as a growth area as the global economy pivots away from fossil fuel technologies into “clean” energy sources, the inflows into these funds—which in some cases represent a sizable portion of their total assets—suggest market participants are making political decisions as much as financial ones.
“If we see Washington step back on an issue like climate change, that makes the actions of each of us, as investors, matter a great deal more. If Washington isn’t going to lead, we need to use every lever at our disposal to make sure companies do the right and smart thing with their environmental policies,” said Andrei Cherny, chief executive officer of Aspiration, which runs the environmentally themed Aspiration Redwood Fund /zigman2/quotes/208690315/realtime REDWX -3.12% .
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The fund has seen pronounced growth since Trump’s election in early November. Since the first of that month, according to data provided by Aspiration, its assets under management have gone to $23.2 million from $5.5 million—more than quadrupling in size—while the number of individual investors have jumped by a factor of more than five, to more than 10,600 from less than 1,900.
“A great majority of our new investors are people who never invested in anything before, not just people who are new to ESG investing,” Cherny said, referring to the investment strategy of tilting a portfolio to companies that score high marks on environmental, social, and corporate governance issues. (There is a difference between ESG strategies and strategies that involve alternative energy companies; a company in any industry can score high ESG marks depending on its internal policies on these issues.)
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Wall Street's latest trend promises to make you richer while also making the world a better place. But will ESG (Environmental, Social, Governance) investing catch on?
Trump withdrew the U.S. from the Paris climate accord, a global agreement to reduce greenhouse gases, something scientists say is crucial for avoiding the worst-case scenarios of climate change. Business leaders had urged Trump to stick with the accord; Trump said the country would aim to establish a new accord favorable to U.S. interests.
Instead of pushing for alternative energies, Trump has frequently pledged support for the coal industry, which analysts see as being in an inexorable downtrend given the shift to alternative energy sources.
While the VanEck Vectors Coal ETF has risen 4.2% thus far this year—sharply below the 8.5% rise of the S&P 500 /zigman2/quotes/210599714/realtime SPX -2.57% —alternative energy funds have nearly exclusively outperformed.
The PowerShares Global Clean Energy Portfolio /zigman2/quotes/202774103/composite PBD -5.98% is up more than 13% in 2017, while the First Trust NASDAQ Clean Edge Green Energy Index Fund /zigman2/quotes/205893823/composite QCLN -4.64% has gained 14.6% and the VanEck Vectors Global Alternative Energy ETF has climbed 17%.
The $86 million iShares Global Clean Energy ETF /zigman2/quotes/205740995/composite ICLN -6.28% is up 10.5%, and it has seen year-to-date inflows of $6.8 million, according to data from ETF.com.
Cherny’s Redwood fund is up 12.5% this year, making it one of the top-performing large-cap blend funds on the market, including ones that don’t have an ESG tilt.
Perhaps the biggest move within the environmentally conscious ETF sector is in funds built around low-carbon strategies, meaning they only hold companies with small greenhouse-gas footprints.
The Etho Climate Leadership U.S. ETF /zigman2/quotes/205434760/composite ETHO -2.55% is up 10.8% in 2017, and the $17 million fund has seen year-to-date inflows of $7.3 million, accounting for nearly half of its total assets. The iShares MSCI ACWI Low Carbon Target ETF /zigman2/quotes/208147001/composite CRBN -2.70% , up 12.5% this year, has had inflows of $51.8 million, accounting for more than a fifth of its $250 million in assets.
A third low-carbon ETF, the SPDR MSCI ACWI Low Carbon Target ETF /zigman2/quotes/204018914/composite LOWC -2.34% , is up 11.5% this year.
Pulling out of the Paris accord is expected to result in lower demand for some alternative energy sources, some analysts say, although others say the trend toward ESG and alternative-energy companies will remain intact.
“U.S. greenhouse emissions are going to keep falling. Would they fall as quickly as they would have if we stayed in the Paris accord? Probably not, but this won’t change the global picture,” said Joe Osha, who covers alternative energy as a managing director and equity analyst at JMP Securities. He added that other countries, like China, were making massive investments in alternative energy technology and adoption.
The impact of pulling out may even be limited in the U.S. Osha said that more than half of greenhouse gas emissions came from two things in the U. S.—power generation and transportation.
“Pulling out of Paris won’t have an impact on power generation; economic forces have been acting there for a while, with natural gas, wind, and solar prices all falling dramatically,” he said. “Changes in policy could impact transportation, if initiatives to support electric vehicles and gas mileage go away, although a lot of this comes from the state policy, which won’t be impacted by pulling out of Paris.”