ESG Is Short Warren and Jamie

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ESG Is Short Warren and Jamie

If you wanted to outperform the S&P 500 this year, one easy way was to short 2 icons of American business: Warren Buffett and Jamie Dimon. And that’s exactly how the largest Environmental, Social and Governance (ESG) exchange traded fund, the iShares ESG MSCI USA ETF (ESGU), has been positioned. This fund represents 22% of all ESG ETF assets under management, a pretty hot slice of the money management world in 2020 with +$12.4 billion of inflows YTD.

That savvy underweight in Berkshire and JPMorgan (plus some other calls we’ll get to in a second) has allowed ESGU to outperform IVV (the S&P 500) by 161 basis points YTD:

  • ESGU: -9.46% YTD return
  • IVV: -11.07% YTD return

As we dug through the top 30 positions in both ESGU and the S&P 500 (IVV), we found it wasn’t just the BRK.B/JPM shorts that have given ESGU its performance edge:

Berkshire Hathaway (BRK.B): -23.70% YTD

  • ESGU weight: 0.45%
  • IVV weight: 1.4%
  • Point contribution differential: 12 basis points, or 7% of relative outperformance.

JPMorgan (JPM): -37.57% YTD

  • ESGU weight: 0.78%
  • IVV weight: 1.16%
  • Point contribution differential: 10 bps, or 6% of the spread.

Exxon Mobil (XOM): -36.77% YTD

  • ESGU weight: 0.65%
  • IVV weight: 0.79%
  • Point contribution differential: 4 bps, or 2% of the spread.

AT&T (T): -26.07% YTD

  • ESGU weight: 0.69%
  • IVV weight: 0.88%
  • Point contribution differential: 3 bps, or 2% of the spread.

And here are overweights that are helping ESGU beat IVV:

Gilead (GILD): +19.96% YTD

  • ESGU weight: 0.77%
  • IVV weight: 0.42%
  • Point contribution differential: 11 bps, or 7% of relative outperformance.

Salesforce (CRM): +9.16% YTD

  • ESGU weight: 0.94%
  • IVV weight: 0.66%
  • Point contribution differential: 6 bps, or 4% of the spread.

Home Depot (HD): +6.65% YTD

  • ESGU weight: 1.3%
  • IVV weight: 1.06%
  • Point contribution differential: 4 bps, or 3% of the spread.

Adobe (ADBE): +10.70% YTD

  • ESGU weight: 0.91%
  • IVV weight: 0.74%
  • Point contribution differential: 4 bps, 2% of the spread.

Nvidia (NVDA): +32.64% YTD

  • ESGU weight: 0.87%
  • IVV weight: 0.81%
  • Point contribution differential: 3 bps, 2% of the spread.

Nextera Energy (NEE): -5.88 YTD

  • ESGU weight: 1.27%
  • IVV weight: 0.45%
  • Point contribution differential: 4 bps, 3% of the spread.

Our investment takeaways from the data:

#1: A large reason ESGU has outperformed IVV this year stems from its lower weightings in really poorly performing stocks such as Berkshire Hathaway and JPMorgan. ESGU’s underweights in those two stocks account for 13% of relative outperformance. These two decisions alone pay much of ESGU’s expense ratio of 15 basis points.

Throw in ESGU’s underweights in Exxon Mobil and AT&T, and these 4 stocks represent almost a fifth (17%) of the relative outperformance of ESGU over IVV.

#2: ESGU also currently overweights stocks tied to important themes amid the COVID-19 Crisis, such as NVIDIA, Salesforce, Adobe, Gilead, and Home Depot. Overweighting a utility, Nextera, by a wide margin has helped despite that it is down on the year because it is still beating the S&P 500.

#3: By our simple math the ten important overweights and underweights we listed make up over a third (37%) of the return spread between ESGU and the S&P 500 in 2020. Performance comes down to tweaks in the weightings at the individual stock rather than sector level. The 5 biggest sector weights in each ETF are actually very similar: Information Technology (27.2% ESGU, 26.5% IVV), Health Care (15.2%, 15.4%), Communication (10%, 11%), Consumer Discretionary (9.8%, 10.4%) and Financials (9.3%, 10.1%).

One notable difference, however: ESGU holds 306 companies compared to 504 for the S&P.

Bottom line: owning less of poor performing names can be just as important as overweighting outperformers, as shown by ESGU’s outsized underweights in Berkshire Hathaway and JPMorgan. As for whether “ESG” is the source of any durable investment edge, we would recast that question this way: “why do JPMorgan and Berkshire Hathaway screen so poorly on ESG metrics?” We think of Warren Buffett and Jamie Dimon as two of the good guys on E, S, and G… But the models say differently, and for better or worse those judgments have delivered alpha.