Behind the summer rally in sustainable funds
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Above, the scene Wednesday as Hurricane Idalia brought a massive storm surge, high winds and heavy rain to Florida — and continued on its drenching northeasterly path. Meanwhile, Hurricane Franklin hit Bermuda and was forecast to bring deadly riptides to parts of the east coast. Read our news brief below on why hurricanes are getting stronger.
There’s nothing like a rising tide to float all boats, and for the beleaguered sustainable fund sector, also known unpopularly as ESG funds, this summer’s rally in U.S. stocks and the dollar has certainly played to form.
Sustainable funds are back in the higher rankings of the performance tables. Morgan Stanley released a report this week that the median return on sustainable funds in the first half of this year was 6.9%, vs 3.8% for what it called traditional funds.
But as Mark Hulbert wrote for Callaway Climate Insights last week, not all sustainable funds are alike, or even similar. The same strategy diversity and investment theme confusion that made ESG funds lightning rods for criticism last year when the market turned is still there.
For example, two of the best performing sustainable funds, the Fidelity U.S. Sustainability Index Fund (FITLX) and the Vanguard ESG U.S. Stock ETF (EVGV) are both up 20% year-to-date. Both are front loaded with tech stocks, such as Nvidia NVDA 0.00%↑, Microsoft MSFT 0.00%↑ , Alphabet GOOGL 0.00%↑, and even Tesla TSLA 0.00%↑ , which have rallied mightily this year as interest rates show signs of peaking and AI fever spreads.
By contrast, the Nuveen ESG Dividend ETF (NUDV), whose top holdings are Home Depot HD 0.00%↑ , Bank of America BAC 0.00%↑ and Coca-Cola KO 0.00%↑ , is up only 2%.
One huge difference between 2020, when ESG ruled the performance tables, and this year is that investors have a much better idea what they are dealing with this year, not only from deeper disclosure about the sustainability focus of major U.S. companies, but the rising risk of climate change itself to certain markets and asset classes.
Sustainability funds are indeed back, but this time we are prepared.
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