How One Fossil Fuel Free ETF Proved Oil Doesn’t Pay
Almost five years ago, the National Resources Defense Council came to State Street Global Advisors with an investment idea.
Those talks resulted in the creation of a green exchange-traded fund, the SPDR S&P 500 Fossil Fuel Free ETF (SPYX), with NRDC among its initial investors. The fund was designed to mimic the performance of America’s Standard & Poor’s 500 Index—minus Big Oil.
Today, the ETF holds 488 of the 505 stocks in the S&P 500. State Street’s timing, it turns out, was just right. Avoiding fossil-fuel stocks has been a boon for investors during the past few years and SPYX has grown into a $650 million fund as it approaches its fifth anniversary in December.
“SPYX gives you the most popular index in the world with a smaller carbon footprint,” said Eric Balchunas, senior ETF analyst at Bloomberg Intelligence. “That’s a tremendous value proposition, and you’ll never wake up in 10 years and see that you’ve underperformed the market because it represents most of the market.”
Firms including BlackRock Inc. have similar funds as SPYX, but none have performed quite as well. SPYX has beaten the S&P 500 by 3.6 percentage points since its inception, generating an annual return of 12.9%.
The fund’s biggest holdings include a bevy of technology stocks—Apple Inc., Microsoft Corp., Amazon.com Inc., Facebook Inc. and Alphabet Inc.—and a smattering of others such as Warren Buffett’s Berkshire Hathaway Inc., Johnson & Johnson and Visa Inc.—that are the largest companies by market value on the S&P 500.
ETFs holding lots of tech stocks (despite their recent dip) have generally outperformed in recent years, while shares of energy companies have lagged behind. A Standard & Poor’s index that tracks the performance of oil and gas exploration and production companies (SPSIOP) has dropped 50% this year, and energy stocks now account for just 2.3% of the benchmark S&P 500, down from 16% as recently as 12 years ago.
“If there is a big rally in Big Oil, you will miss that if you own SPYX,” Balchunas said. “That’s really the only risk.” But still, another advantage to SPYX is that the management fee is low, at $20 per $10,000 of investments, he said.
SPYX is categorized as an ESG fund, even though it offers only the “E” – environmental – and not the “S” (social) and the “G” (governance). In the fast-growing foggy world of ESG investing, SPYX is as straightforward a fund as one can find. It won’t buy shares of companies with proven fossil-fuel reserves on their balance sheet. That means the 17 S&P 500 stocks it avoids include Exxon Mobil Corp., Chevron Corp. and Marathon Petroleum Corp.
“The expectation is SPYX will keep growing as the shift to clean energy—wind and solar—is only going to gain momentum, both from a consumer and investor standpoint,” said Matthew Bartolini, head of SPDR Americas Research at Boston-based State Street Global Advisors. SPYX has attracted a net $160 million of new investment so far this year, he said.
For “S” and “G” funds, State Street has an ETF that focuses on gender diversity (SHE) and a fund that invests in companies that score highly on ESG metrics relative to their peers (EFIV), Bartolini said.
Unsurprisingly, managers of ESG funds have been raking in the money. An estimated $41.5 billion flowed into ESG- and values-focused ETFs this year as of Aug. 31, which already surpasses the calendar-year record of $30.9 billion set in 2019, according to data compiled by Bloomberg Intelligence.
SPYX was launched about a year after the United Nations prodded State Street to offer a low carbon exchange-traded fund—the SPDR MSCI ACWI Low Carbon Target ETF (LOWC)—tied to the MSCI All-Country World Index (MXWD).
“We are constantly having discussions about clean-energy solutions and structuring products to meet our clients’ specific needs,” Bartolini said.
LOWC hasn’t performed as well as SPYX, however. That’s because the S&P 500 has gained 18 percentage points more than the MSCI All-World index since the end of 2015.
Sustainable Finance in Brief
- Federal Reserve Bank of Atlanta President Raphael Bostic (above) called for comprehensive changes to address racial wealth inequality in the U.S.
- Despite all the talk, BlackRock and Vanguard Group aren’t doing much to assist global investor efforts on climate change, according to nonprofit group Majority Action.
- Europe’s green-bond market is giving companies cost benefits alongside the environmental kind, giving rise to a so-called brownium charge for conventional debt sales.
- General Electric said it plans to stop supplying equipment to new coal-fired power plants.
- Walmart is making promises about achieving zero emissions.
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