By Debbie Carlson
The environmental, social and governance exchange-traded fund that’s seen the biggest inflows year-to-date isn’t a renewable energy ETF and doesn’t belong to one of the behemoth fund families.
The company behind the fund didn’t even put the term ESG fund, and two top research firms are divided whether it qualifies as an ESG fund under the governance pillar because of its theme.
That fund is the six-year-old WisdomTree Emerging Markets ex-State-Owned Enterprises Fund /zigman2/quotes/208220566/composite XSOE -2.03% , which invests in companies that are no more than 20% owned by a government and therefore is seen as a way to avoid the risk of government pressure on the company at the expense of outside shareholders. It had $4.77 billion in assets under management as of March 26. So far this year, it has gathered $1.2 billion alone, a 38% increase.
The next-biggest asset gatherer is a familiar name: iShares ESG Aware MSCI USA ETF /zigman2/quotes/208081415/composite ESGU -0.84% , the biggest ESG ETF by assets. It holds $15.2 billion – more than triple the size of the WisdomTree fund — and has seen 8% asset growth so far this year.
Two other iShares ESG ETFs has also seen significant flows so far in 2021: iShares ESG Aware MSCI EAFE ETF /zigman2/quotes/205477493/composite ESGD -0.32% and iShares ESG Aware MSCI EM ETF /zigman2/quotes/206783236/composite ESGE -1.69% , which have seen asset increase 21% and 13%, respectively. Vanguard’s ESG U.S. Stock ETF /zigman2/quotes/205112700/composite ESGV -1.20% rounds out the top five AUM growers, seeing 22% growth.
Todd Rosenbluth, director of ETF research at CFRA, says he was “caught off guard” by the strong growth in both the WisdomTree fund, and in a similar WisdomTree fund, WisdomTree China ex-State-Owned Enterprises Fund /zigman2/quotes/209006653/composite CXSE -3.42% , which has brought in nearly $1 billion in new funds so far this year.
“The ‘g’ pillar of ESG has been popular. Investors are more aware of China in particular, but also the heavy hand that government plays in certain industries in a non-shareholder friendly way,” he says.
The World Bank noted in a recent research report that performance problems with certain state-owned enterprises have been noted for decades.
Jeff Weniger, head of equity strategy, WisdomTree, says although the fund doesn’t have ESG in the name, it has been constructed to be an ESG fund through a few extra criteria such as screening out thermal coal and tobacco.
“We have some investors are doing a dedicated search for an ESG mandate, and others are just looking for high-quality emerging funds,” he says, adding that the emerging-market companies that are likely to be polluters are usually state-owned companies.
He says the fund has been able to sidestep issues with Brazil and China, such as when Brazilian President Jair Bolsonaro fired the CEO of Petrobras /zigman2/quotes/200756154/delayed BR:BRDT3 -0.13% /zigman2/quotes/219645479/composite PETRY +0.56% , the state-owned oil company, and installed a military general with no oil and gas background.
“We were able to eliminate a lot of this headline risk, at least in the past tense, we would hypothesize that would be the case in the future sense,” he says. “The big one is always China.”
The three main Chinese ESG issues are the country’s oppressive treatment of the Uyghur population in the mainland, political pressure in Hong Kong and saber-rattling in Taiwan, he says.
Elisabeth Kashner, director of ETF Research at FactSet, says FactSet classifies the WisdomTree fund as an ESG investment because of its corporate governance. The fund argues that corporate governance is generally better in private firms than at state-owned companies.
Because there are no set standards nor guidelines to define what is and isn’t ESG, research firms decide for themselves if a fund falls under the three ESG pillars.
Morningstar doesn’t consider the WisdomTree fund an ESG fund.