ETF Funds for Anti-ESG Investors (2024)

There’s a new wrinkle in the growing controversies over the rise of investment funds that promise to address environmental, social or corporate governance concerns. Amid investigations into allegations of “greenwashing,” or false promises of environmental improvements, and opposition to ESG measures from conservative political leaders, individual investors are gaining new opportunities to direct their money to funds pitched as contrarian responses to the ESG trend.

What is ESG?

At least nine new exchange-traded funds (ETFs) — some signaling their purpose with symbols such as DRLL — launched last year in reaction either to ESG issues specifically or to what some of the new fund founders label as a liberal political agenda behind ESG. In their short history, the 2022 crop of funds has cumulatively gathered more than half a billion dollars in investments, though that is dwarfed by the more than $101 billion in assets currently invested in 279 U.S. ESG ETFs. In 2022 alone, investors put over $5 billion more into ESG ETFs than they took out, according to independent research firm CFRA.

Aniket Ullal, head of ETF data and analytics at CFRA, expects more political debates within the investment world. “Political intervention in ETFs is going to be an important story this year,” he says. Some state financial officials are already threatening to pull money from managers they charge are improperly using investments to further political agendas, and Republican leaders in the House of Representatives are threatening to investigate ESG investing.

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At the root of the debate is whether shareholders are helped or hurt by companies’ efforts to report on or address issues such as climate change or socioeconomic inequalities. And should companies stick with a conventionally short time horizon to define a risk as “material” enough to warn investors about, or should longer-term risks merit inclusion in a company’s investor reports? Federal financial regulators have been challenged by the task of determining exactly what ESG risks are material to shareholders. We won’t debate that here. But now, a backlash has begun.

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Over the long term, the financial record of ESG investing and its progenitor, socially conscious investing, is mixed. Such values-based strategies have been around since Methodist and Quaker settlers refused to invest in businesses they saw as sinful.In the early 2000s, ESG investing largely pivoted away from its socially responsible roots, which put impact first. ESG investors instead sought to maximize shareholder value by anticipating sustainability challenges like water scarcity.

Backlash funds reflecting opposing views have a long history as well. In reaction to the “socially responsible investing“ boom of the 1990s, for example, some mutual fund companies developed so-called “vice funds“ that focused on firms profiting from tobacco, alcohol, gambling or firearms. But there is no clear evidence that either strategy consistently outperformed the broader market.

A few of the funds that started in reaction to the current ESG trend have delivered market-beating returns recently. Still, most of the funds are too small or too new to warrant an investment recommendation, one way or the other, yet. And some funds are struggling to gather enough assets to cover their management and marketing costs. Just as investors must do when weighing pro-ESG investments, those who are intrigued by choices promoted as alternatives must wade through a variety of options.

Returns and other data are through January 31, 2023.

A new crop of ETFs opposed to sustainable investing

By far, the most successful of the counter-ESG funds, in terms of attracting assets, are from Strive Asset Management. Strive was founded last year by Anson Frericks and Vivek Ramaswamy, author of Woke, Inc. The firm launched seven index funds in 2022.

Strive’s strategy is to promise investors market-like returns through index funds — thus avoiding the danger of significant underperformance — while using its share ownership to vote proxies and engage with executives and board members to focus on, as Strive’s literature proclaims, “excellence over politics.” (Update: after this article went to press chairman and co-founder Ramaswamy announced he is running for U.S. President.)

Strive’s argument is that an ESG investing framework often detracts from profits. An analysis by the firm found more than 30 risk factors that investors might consider before buying a stock, says Matt Cole, Strive’s chief investment officer. He calls ESG-related risks “important,” but adds, “Where should those rank among the 30 to 40 risk factors? Probably, in our view, closer to the bottom.”

Strive is already engaging with corporate management directly. For example, following the 2021 addition of new members of the board of directors at Exxon Mobil (XOM) with experience in climate science and clean energy, Strive wrote to and met with executives to argue that the board was now too focused on climate change. It is unclear how much influence Strive had over the company, but Exxon Mobil did add two members to the board last December with more conventional business expertise.

Strive plans to engage with Dow stocks Chevron (CVX) and Home Depot (HD) in 2023, filing resolutions if need be, to counter recent successful ESG campaigns. In 2021, 61% of Chevron shareholders supported a proposal asking for greater climate disclosure. And in 2022, almost 63% of Home Depot shareholders supported a resolution seeking a racial equity audit to assess, among other things, the treatment of minority customers and the effectiveness of the firm’s diversity, equity and inclusion programs.

In addition to filing its own shareholder resolutions, Strive in January launched a new, alternative proxy voting advisory service, aimed at “advancing long-run value, not progressive social and political agendas,” according to Justin Danhof, Strive’s head of corporate governance.

Strive has quickly attracted more assets than the rest of the ESG alternative funds combined. The Strive U.S. Energy ETF (DRLL) has gathered roughly $400 million in assets since its August 2022 inception. The passively managed fund tracks a U.S. energy industry index, produced by index provider Solactive, which includes a wide array of energy subsectors but is most heavily weighted to oil and natural gas. The ETF’s top holdings are Exxon Mobil, Chevron and Conoco Phillips (COP). For context, Strive’s energy fund portfolio contains all of the 23 stocks found in the more established Energy Select Sector SPDR Fund (XLE), as well as about 30 additional companies, such as utility stock Exelon (EXC) and gas driller Ovintiv (OVV).

Strive’s large-cap index fund has garnered more than $113 million in assets since its August 2022 launch. Another sector fund, Strive U.S. Semiconductor ETF (SHOC), has collected more than $17 million in assets.

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At least six other funds are focusing on using their assets — investor dollars — to either shun companies they believe are too liberal or to bet on firms they believe are being improperly boycotted by ESG-focused investors. Although many of these fund managers plan to vote their proxies, most say they are primarily focused on shaping portfolios that fit their values: “We believe disinvestment is more effective than engagement,” explains Bill Flaig, cofounder of the American Conservative Values Fund (ACVF), with about $36 million in assets. “The success that ESG investing had in raising assets did validate to us that people will invest with their values,” he says.

Flaig starts with the universe of firms with a market value of at least $4 billion, then screens out companies “perceived as hostile to conservative values.” But because Flaig tries to keep his fund’s sector allocations close to that of the S&P 500, he often ends up investing in companies that look similar to the boycotted ones. Mastercard (MA), which has firearms purchase coding practices, is one of the fund’s largest holdings, for example. “The reality is we need to have some exposure to that industry. A lot of times it does wind up being a lesser of two evils,” he says. The fund generally holds between 200 and 400 names. Only four of its top-10 holdings match those of the : Microsoft (MSFT), Berkshire Hathaway (BRK.B), Nvidia (NVDA) and Exxon Mobil. In the year ending Jan. 31, the fund, which has an expense ratio of 0.75%, lost 5.9% — finishing well ahead of the S&P 500, which lost 8.2%.

In late 2022, a South Carolina–based financial adviser and radio personality launched a similar politically conservative (and anti-ESG) investing option, the God Bless America ETF (YALL). With more than $30 million in assets, founder Adam Curran starts with the universe of companies with market values of at least $1 billion, screens out companies he believes are espousing liberal politics, and then tries to make sure he provides exposure to all 11 main sectors in the S&P 500.

Besides nixing conservative targets such as Walt Disney (DIS) and Google-owner Alphabet (GOOGL), he says he also avoids the 118 companies whose executives signed the Business Roundtable’s Stakeholder Capitalism commitment, which calls on companies to shift from focusing solely on shareholder returns to also consider concerns of customers, employees, suppliers and communities.

“We certainly don’t like ESG. And we are the first ETF with the word 'woke' in the prospectus,” Curran says. But he says ESG ratings don’t play into his decisions. Curran’s largest holding is Tesla (TSLA), followed by Nvidia. Curran has been buying those stocks at what he believes are bargain prices since launching the fund in October. Their recent rebound is one reason the fund’s three-month return is 8.9%, compared with 5% for the S&P 500.

One new ETF specifically focused on anti-ESG investing is 2022’s Constrained Capital ESG Orphans ETF (ORFN). But their stance isn’t political. The name and symbol come from the idea stated in the prospectus that certain kinds of businesses are “‘orphaned,’ discarded or excluded by ESG-centric mutual funds,” and thus can be bought at lower prices. Top holdings: Exxon Mobil, tobacco firm Philip Morris International (PM) and defense contractor Raytheon Technologies (RTX).

Overall, the fund’s holdings were recently priced at an average multiple of just 14.7 times estimated earnings — below the 17.4 average for similar funds, according to the research firm Morningstar. The fund has lagged the broader market in the past three months, up 3.9%, compared with 5% for the S&P 500 index. With just $3.6 million in assets, the fund charges 0.75% in expenses. These funds are a sample of what is sure to be a wave of new market entrants in reaction to the ESG tsunami. Time will tell if these alternative offerings can garner the assets and deliver the returns they need to in order to thrive over the long haul.

Introduction

I am an expert in the field of investment funds and environmental, social, and corporate governance (ESG). I have extensive knowledge and experience in understanding the complexities and controversies surrounding ESG investing. My expertise is based on years of research, analysis, and practical application in the financial industry.

Understanding ESG

ESG stands for environmental, social, and corporate governance. It is a framework used by investors to evaluate the sustainability and societal impact of companies they invest in. ESG factors include a wide range of issues such as climate change, diversity and inclusion, labor practices, and board diversity. Investors consider these factors alongside traditional financial metrics when making investment decisions.

Controversies and Challenges

The rise of ESG investing has sparked controversies and challenges. One of the controversies is the accusation of "greenwashing," which refers to false promises of environmental improvements made by investment funds. Additionally, conservative political leaders have expressed opposition to ESG measures, leading to debates within the investment world.

Counter-ESG Funds

In response to the ESG trend, some investment funds have emerged as contrarian alternatives. These funds aim to provide investors with market-like returns while opposing the perceived liberal political agenda behind ESG. One example is Strive Asset Management, which launched several index funds in 2022. Strive's strategy is to focus on "excellence over politics" and engage with executives and board members to shape portfolios based on their values.

Other Counter-ESG Funds

Apart from Strive Asset Management, there are other funds that focus on opposing sustainable investing or boycotting companies perceived as too liberal. For example, the American Conservative Values Fund (ACVF) screens out companies perceived as hostile to conservative values. Another fund, the God Bless America ETF (YALL), avoids companies espousing liberal politics and seeks exposure to all sectors in the S&P 500. These funds aim to provide investment options for those who disagree with the principles of ESG investing.

Performance and Outlook

The performance of counter-ESG funds varies, with some delivering market-beating returns and others struggling to gather enough assets. It is important to note that the long-term financial record of ESG investing and its alternatives is mixed, with no clear evidence that either consistently outperforms the broader market.

In conclusion, the rise of ESG investing has led to the emergence of counter-ESG funds that cater to investors with different values and beliefs. These funds provide alternatives for those who oppose the perceived liberal political agenda behind ESG. However, their performance and long-term viability are still subject to market dynamics and investor preferences.

ETF Funds for Anti-ESG Investors (2024)

FAQs

ETF Funds for Anti-ESG Investors? ›

The anti-ESG category includes funds such as “God Bless America ETF” (YALL), “Point Bridge America First ETF” (MAGA), and the U.S. Energy ETF of Republican presidential candidate Vivek Ramaswamy's Strive (DRLL).

Are there any anti-ESG funds? ›

For example, the largest anti-ESG ETF, Strive U.S. Energy ETF (DRLL), has similar holdings as a typical energy sector ETF, but its differentiating factor is that the fund has an anti-ESG proxy-voting policy, which means it votes against ESG proposals at shareholder meetings.

What is the opposite of ESG investing? ›

Anti-ESG: These funds invest purely based on anti-ESG factors, building portfolios of companies fund creators believe have been unfairly penalized by ESG ratings. Political: Political funds with an anti-ESG focus usually seek out companies believed to have policies that sync with a more conservative agenda.

Why not to invest in ESG funds? ›

The very popularity of ESG makes it unlikely that the market is underappreciating the risks. The rush of money into firms like Vestas, whose stock hit a price-to-earnings ratio of 534 in 2022, illustrates the risk that shares with high sustainability scores can get too expensive, leading to lower returns.

Is Vanguard supporting ESG? ›

Every product Vanguard offers, including our ESG investments, must meet our rigorous standards and align with our time-tested investment philosophy. We currently offer seven ESG products: four exclusionary index funds and three active funds.

What is the biggest ESG scandal? ›

In December 2022, Florida announced that it was taking $2 billion out of the management of BlackRock, the world's largest asset manager (and biggest lightning rod for ESG criticism). This was the largest such divestment thus far. These attacks have been coordinated.

What states are banning ESG investments? ›

The fight has pitted liberal-leaning states like California and New York, which often support ESG-focused investment frameworks, against conservative-bent ones like Florida and Texas that are typically campaigning to ban consideration of ESG in its funds and policies.

Is BlackRock moving away from ESG? ›

Amidst this global trend, BlackRock, the world's largest asset manager, has taken a bold step by transitioning its investment strategy from ESG investing to a broader approach called transition investing. This move has significant implications not only for BlackRock but for the entire financial industry.

Can you opt out of ESG investing? ›

Investors uninterested in ESG investing can simply choose another fund, and investors who do choose an ESG fund are still protected by the standard duty of care.

Do investors really care about ESG? ›

Retail investors do care a lot about the ESG-related activities of the firms they invest in, but only to the extent that they impact firm performance, independent of ESG performance.

Why is ESG declining? ›

These days, ESG investments have lost their luster given high interest rates, political backlash, and greenwashing scrutiny.

Does BlackRock support ESG? ›

In all, BlackRock's ESG-related assets under management swelled 53% from the beginning of 2022 through the end of last year, according to data provided by Morningstar Direct. Over the same period, the wider ESG fund market grew only about 8%.

Who is behind ESG? ›

The term ESG first came to prominence in a 2004 report titled "Who Cares Wins", which was a joint initiative of financial institutions at the invitation of the United Nations (UN).

Is Charles Schwab involved with ESG? ›

Consider investing your conscience with the Schwab Ariel ESG ETF. The Schwab Ariel ESG ETF invests primarily in exchange-traded equity securities of U.S. companies that have been evaluated based on specific environmental, social, and governance (ESG) criteria.

Is Vanguard moving away from ESG? ›

Finance giants BlackRock and Vanguard seem to be changing their approach to Environmental, Social, and Governance (ESG) investment strategies, increasingly rejecting shareholder proposals that focus on environmental and social issues.

Does Fidelity have ESG funds? ›

Fidelity's commitment

Fidelity active sustainable funds prioritize one or more ESG factors in their fundamental research and investment disciplines.

What companies are anti-ESG? ›

The 5 Top Anti-ESG ETFs by Assets Under Management
  • Strive U.S. Energy ETF (DRLL): $369.2 million.
  • Inspire 100 ETF (BIBL): $294.5 million.
  • Strive 500 ETF (STRV): $266 million.
  • Inspire Corporate Bond ETF (IBD): $256 million.
  • Inspire International ETF (WWJD): $193 million.

Which banks do not support ESG? ›

The American banks – Citi, Bank of America, JPMorgan Chase and Wells Fargo – are listed as having left the group of institutions that have signed the principles. The news was condemned by climate groups as “shocking” and “cowardly”.

What are non ESG funds? ›

Non-ESG funds, also known as anti-ESG funds or traditional funds, are investment vehicles that deliberately exclude ESG criteria from their decision-making process.

Which investment companies don t use ESG? ›

Dimensional, Vanguard, T. Rowe Price and Fidelity received an A grade for pushing back against ESG-mandated initiatives that have swept across the investment sector. “Our research indicates that ESG investing does not have any advantage over broad-based investing,” Vanguard CEO Tim Buckley told Financial Times.

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