As ETF Issuers Crowd Into ESG, Some Investors Say Enough Already

(Bloomberg) -- Even a boom in exchange-traded funds touting their environmental, social and governance credentials isn’t enough to convince investors to buy these strategies.

A new report from Cerulli Associates, a Boston-based research and consulting company, shows it’s fund providers that want these products, not financial advisers. While 46 percent of issuers see unmet demand for products focused on ESG and socially responsible investing, only 17 percent of advisers share that view, the survey showed.

With more than 2,000 ETFs in the U.S., it’s becoming increasingly difficult to start a fund that stands out from the crowd. That has issuers herding into trendy areas that seem to promise growth and sectors where they can tout their years of expertise. Unfortunately, that can come at the expense of what their clients, like financial advisers, want.

“Issuers are largely looking to provide products based on their own capabilities, which makes sense but also makes it challenging,” said Daniil Shapiro, head of ETF research at the company. “Everyone is obviously very interested in rolling out the next equity strategy or the next fixed income strategy,” he said, even though “advisers are looking for that diversification away from equity and fixed income markets.”

That split is certainly evident when it comes to international debt funds, where 46 percent of issuers see interest, yet only 18 percent of financial advisers agree. And, while a third of advisers see unmet demand for currency-related ETFs, zero issuers share their concern, the survey showed.

But this divide doesn’t necessarily mean issuers have their heads in the sand; instead it could be a function of the way they typically communicate with financial advisers, according to Shapiro. Many advisers operate under the aegis of a so-called home office, which provides centralized support and often acts as an intermediary between them and fund providers.

“Issuers are seeing the demand for these products from home offices, while advisers are basically saying that they’re not interested,” Shapiro said of ESG. “It’s possible that the home offices basically have a push to educate the advisers at one point, which might create more demand,” he said, adding that the divergence between issuers and advisers on ESG is starting to narrow.

©2019 Bloomberg L.P.