By Andrew Shilling
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Helping the earth and making bank? That’s the promise of sustainable funds, and investors are increasingly pouring money into them. With net flows in the sector reaching a record $69.2 billion in 2021, up 35% from the year prior, sustainable sector funds now claim $357 billion in total assets, according to a Morningstar report . That’s four times what it had three years prior.
Of course, not all of them are a resounding success, and there’s a lot of green-washing in this space. But some do churn a tidy profit for investors: Every one of the top 10 in Morningstar’s sustainable funds (see the top 10 list below) landscape in Q2 2022 outpaced broader equities markets over the past five years, Morningstar data show. These top 10 funds had an average annualized gain of 18.8% since 2017. Meanwhile, the SPDR S&P 500 ETF Trust, or SPY, and the SPDR Dow Jones Industrial Average ETF, also known as DIA, had returns of 10.54% and 8.38%, respectively.
What to know before investing in sustainable funds
So now you want in on the action, but you want to be sure you’re truly sustainable? While that does seem like a completely doable feat when looking at these numbers, the reality is that “most funds that claim to be eco-friendly are actually greenwashing,” says Peter Krull, the founder, CEO and director of investments at Earth Equity Advisors, a registered investment advisory firm in Asheville, North Carolina.
Although funds Morningstar deems to be sustainable are categorized by their underlying holdings to determine various levels of corporate and sovereign ESG risk, Krull says sometimes that’s not enough to meet your own personal comfort level. If you want to be sure of where you’re putting your money, investors, he says, should always take the time to look under the hood. “If it looks similar to one of the big indexes, it’s probably not sustainable,” he said, adding that fund companies often overlay an ESG screen on an established index and call it sustainable. “There has to be some intentionality to it, there has to be companies included that are actually working on the climate crisis, resource scarcity and making the world a better place, not just ones trying to be less bad.”
Sustainability aside, the fees associated with the best-performing eco-friendly funds over five years were slightly higher than industry average. At 0.62%, funds in this ranking had a net expense ratio 22 basis points higher than the asset-weighted average across all funds, which was 0.40% in 2021, according to Morningstar’s latest fee study .
The 10 best-performing sustainable funds
Mutual funds and ETFs in this ranking have assets of at least $100 million and investment minimums of less than $100,000. Daily returns are as of Sept. 20. All data is from Morningstar Direct.
10. Nuveen ESG Large-Cap Growth ETF (NULG)
5-yr. annualized return: 13.46%
YTD return: -29.28%; 1-yr. return: -24.36%; 3-yr. annualized return: 11.39%; YTD net share class flow (millions): $109.94; 1-yr. net share class flow (millions): $191.24; 3-yr. net share class flow (millions): $754.67; 5-yr. net share class flow (millions): $798.45; Net expense ratio: 0.25%; Minimum initial investment: N/A; Fund size (millions): $770.83; Inception date: 12/13/2016; Manager names: Lei Liao and Philip James (Jim) Campagna
9. Calvert US Large Cap Growth Responsible Index I (CGJIX)
5-yr. annualized return: 13.73%
YTD return: -25.56%; 1-yr. return: -19.11%; 3-yr. annualized return: 12.58%; YTD net share class flow (millions): $133.97; 1-yr. net share class flow (millions): $156.96; 3-yr. net share class flow (millions): $218.33; 5-yr. net share class flow (millions): $228.16; Net expense ratio: 0.24%; Minimum initial investment: $100,000; Fund size (millions): $376.16; Inception date: 6/19/2015; Manager name: Thomas C. Seto
5-yr. annualized return: 14.1%
YTD return: -21.63%; 1-yr. return: -15.1%; 3-yr. annualized return: 9.7%; 10-yr. annualized return: 13.15%; 15-yr. annualized return: 9.69%; YTD net share class flow (millions): -$84.25; 1-yr. net share class flow (millions): -$106.21; 3-yr. net share class flow (millions): -$200.94; 5-yr. net share class flow (millions): -$334.4; 10-yr. net share class flow (millions): -$1,584.78; 15-yr. net share class flow (millions): -$1,310.48; Net expense ratio: 0.91%; Minimum initial investment: $1,000; Fund size (millions): $5,631.05; Inception date: 8/24/1987; Manager names: Jeffrey A. Miller, Joseph B. Hudepohl, Lance V. Garrison and Robert R. Walton
