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Performance Attributes of Environmental, Social, and Governance Exchange-Traded Funds

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Abstract

Recently, interest in socially responsible investing has grown, including new investment vehicles such as environmental, social, and governance exchange-traded funds (ESG ETFs). Despite their rising popularity, few studies have attempted to examine the performance characteristics of these stylized funds. This study aimed to fill this knowledge gap by elaborating on the performance attributes of ESG ETFs and examining fund managers’ security selection and market timing skills. Our results suggest that these funds generally underperform relative to conventional ETFs in many aspects. Additionally, the market timing skills of fund managers require improvement but are comparable to those of conventional ETFs. These results are robust to selecting the individual funds and alternative indices used in the sample. Furthermore, both the security selection and market timing skills of ESG ETF managers deteriorated significantly during the COVID-19 pandemic. Finally, the results indicate a slightly weaker cointegrated relationship between ESG ETFs and their benchmark indices when compared to conventional ETFs, suggesting that potential investors in ESG ETFs should carefully inspect the funds to make informed decisions.

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Notes

  1. As of August 2017, more than 1750 signatories from over 50 countries representing approximately $70 trillion have signed up to the Principles.

  2. The data were retrieved from https://www.statista.com/statistics/224579/worldwide-etf-assets-under-management-since-1997/ on March 18, 2023.

  3. See https://etfgi.com/news/press-releases/2022/09/etfgi-reports-esg-etfs-listed-globally-gathered-net-inflows-us274 (accessed on March 18, 2023).

  4. See https://www.etf.com/channels/socially-responsible (accessed on July 24, 2020).

  5. The following 11 ETFs (listed by their tickers) were removed based on their fund descriptions: BIBL, ISMD, and WWJD invest based on biblical values; MAGA invests in companies that support Republican candidates; SDG belongs to the thematic category; KRMA focuses on the stakeholders of a company; RESD, RESE, and RESP had different fund names and trading strategies prior to March 16, 2020; SDGA and ESGG’s actual holdings are inconsistent with their global category.

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Acknowledgements

The authors thank the participants and discussants at The 9th International Conference on Economics and Finance Research, Paris, France.

Funding

Jianing Zhang acknowledges the support by the National Natural Science Foundation of China [No. 71972123] and the Internal Research Support Program of Wenzhou-Kean University [No. IRSPG202206].

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Authors and Affiliations

  1. Department of International Trade and Finance, Yasar University, Izmir, Turkey

    Hasan F. Baklaci

  2. School of Finance, Dongbei University of Finance and Economics, Dalian, 116025, China

    William I-Wei Cheng

  3. College of Business and Public Management, Wenzhou-Kean University, Wenzhou, 325060, China

    Jianing Zhang

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Baklaci, H.F., Cheng, W.IW. & Zhang, J. Performance Attributes of Environmental, Social, and Governance Exchange-Traded Funds. Asia-Pac Financ Markets 31, 307–334 (2024). https://doi.org/10.1007/s10690-023-09416-9

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