Rising interest rates have meant sustainable funds are at risk of falling out of fashion even more rapidly than Asset Allocator's latest haircut, and regulatory changes may make life even harder.
The FCA is rolling out new labelling laws later this year, and crucially ETFs will be excluded from its scope. This is due to the fact they are almost exclusively domiciled in Ireland and Luxembourg, two destinations famed for their tropical climes and, er, beneficial corporate tax laws.
Our sister title, the Financial Times, covered this in depth but we are more concerned with what the ruling could mean for fund selectors.
While nobody knows the answer for certain yet, the FCA's rules provide a useful springboard for Asset Allocator to examine the popularity of ETFs and passive funds within the sustainable portfolios (if we’re still allowed to call them that) we monitor.
We thought we’d take a look at the proportion of ETFs (that would in theory fall outside of the sustainability labelling rules) among the funds held by DFMs in our database to see what the impact might be if ESG selectors were suddenly unable to use ETFs.
The chart below yields some interesting results.
As you can see, Japan leads the way as the region with the highest proportion of ETFs in our database – the most popular of which is BlackRock’s iShares MSCI Japan SRI ETF, owned by three fund houses. But its position is also down to the narrow band of options on offer – our database counts just 10 in total.
In the US, exactly 50 per cent of DFMs’ held sustainable funds are ETFs, with iShares once again leading the charge as its MSCI USA SRI ETF is held by five allocators in total.
When contrasted with the proportion of global sustainable equities, the results are more striking: just 5 per cent of the funds in this region are ETFs.
Average allocations to global funds is signficantly higher in ESG portfolios than in non-ESG portfolios. Our ESG database has the average exposure to global funds at just shy of 20 per cent while in non-ESG portfolios this sits at just less than 8 per cent.
Regular followers of Asset Allocator will recall that last year Schroders binned its exposure to UK, European and US funds entirely in favour of a global approach in its ESG portfolios.
Further, in some of the more offbeat sectors of the market, the negligible weighting to ETFs among our DFMs continues, specifically in both thematic and commodity funds.
17 per cent of thematic funds are ETFs and 28 per cent of commodity funds are ETCs.
And not too long ago, we analysed Cathie Wood’s plans to bring a dose of exchange-traded evangelism to Europe with her acquisition of Rize in September.
Back then, we discussed the eschewing of vanilla-type ETFs by UK-based DFMs, and how this can in part be explained by the cost of entry and exit compared to the US, and the relative ease of entering domestic vehicles such as Oiecs and unit trusts.
Should ETFs struggle to attain the necessary green labels, this could pose a problem for allocators who may have to navigate a regulatory minefield when selecting products for portfolios and it may accelerate moves to a more global outlook.
Until then, business as usual for green allocators.
