BlackRock’s New Sustainable ETF Off to a Good Start
More and more investors are looking to invest in funds that are governed by social and not just economic principles. BlackRock’s latest offering just beat the record for first day inflows with a socially-focused ETF.
BlackRock is the leader in exchange traded funds, or ETFs, although some, including some at the SEC, feel that their dominant position somehow impedes their offering novel funds.
While smaller fund companies may have some trouble rolling out what we could call niche funds, those whose appeal is pretty narrow and thus the market for them may not be that large, BlackRock certainly has all the muscle that they need to do such things, when they are financially viable that is.
Funds that fail either simply are not viable or the fund company hasn’t put enough work and money into them, which are exactly the reasons why some of these smaller funds don’t end up being profitable. There is a critical mass of interest that needs to be obtained before you can use economies of scale to make a profit off of managing them, and in some cases, even with the big elephant of the industry promoting them isn’t enough.
While some may bemoan the competitive advantages that BlackRock and the other giants of the ETF industry enjoy, that’s the nature of business, although this does not stop these companies from rolling out new products if there is enough demand for them.
An example of this is the company’s new ETF, the iShares ESG MSCI USA Leaders fund. The goal of the fund is to be comprised of companies that are deemed to be environmentally sustainable enough, appealing to those who are willing to set aside their financial goals to some extent for the peace of mind of supporting companies who are more environmentally friendly.
This is not the first of these funds, and we’re now up to 78 of them, half of which are less than three years old. There are various criteria for them, although this isn’t what people unfamiliar with this sort of fund may think, as there are even some oil companies involved here, although the goal is to choose from the friendliest in a sector even though the sector itself may not be that friendly compared to others.
BlackRock’s Latest ETF a Big Fish in a Very Small Pond
The USA ESG ETF took in a billion dollars’ worth of investment in its first day, which may sound pretty impressive until you compare it to the ETF industry as a whole, and a billion dollars doesn’t look so big when you compare it with trillions of dollars.
ETF launches are a lot like IPOs with stocks, where big investors are recruited prior to its release to the market. The billion dollars that a pension fund throws into an ETF to get them started may have us thinking that it will be a big hit, but when you add up all the money in all these funds, it doesn’t amount to much at all in the grand scheme of things.
This is still very much a tiny niche market, even though people look upon newer generations and believe that this will be a much bigger issue to younger people once the wealth of their parents gets transferred to them. There probably is some truth to this, but we’re a long away from any big change to be sure.
Investors become attracted to so-called socially conscious funds mostly because they think that their investing in them will somehow help the world. This is a real misconception though and it’s because we invest on the secondary market, and the only real difference when we buy stock in these companies is that we own the stock versus someone else owning it.
The companies themselves don’t see any of your money or really have anything to do with your trade other than it involving their stock, and after they issue stock, it just gets passed around. You get a share of their profits through their dividends instead of someone else, but that’s not the reason why people direct their investing this way, as they somehow think that our doing this will help the companies we like and perhaps hurt the companies that we don’t like and won’t invest in.
There are activist investors and activist funds out there, but they invest in companies that they see opportunities for change with and then use their leverage to try to make it happen. They don’t invest in companies that they already love to do this because that’s not where the work needs to be done.
These ETFs Don’t Really Have Any Practical Impact
When we invest in an ETF that has no special mandate other than putting together companies that have more positive views on the environment, or for any other socially conscious reason, no one is promoting any change here. Meanwhile, investors have sacrificed profit to achieve this goal, and whenever we use non-financial reasons to invest in something, there will be a price to pay financially, as our social goals to some extent will replace the goal of capital growth.
This type of investing only represents a tiny portion of overall funds in play, and we’re a very long away from it making any kind of meaningful impact. If and when it does, funds of this sort won’t exert any real influence on companies anyway, at least until their footprint becomes very large, not in the billions but in the trillions.
It’s not that this dream isn’t possible one day, with companies changing their strategies to appease a much more environmentally conscious group of shareholders, but if this ever does happen, it is many years and perhaps even decades away.
There are many ways that we can affect the desired change, starting with governing our own lives more toward this goal, as well as participating socially. Social investing just doesn’t add anything meaningful to this.
We’d be better off focusing on making money and then giving a proportionate amount of that to charities that support our causes, because this at least would take the money foregone with this style of investing and put it to good use instead of just wasting it.
We still might derive some psychological satisfaction, and if so, perhaps the money that we are leaving behind may be worth it, but if this satisfaction is based upon a misunderstanding of the matter, we may wonder how wise this actually is.
In the end though, when all this ends up mattering, when we’re in our retirement, and we fall short of our savings goals, which just about everyone does, we may wonder whether our past illusions have provided us enough satisfaction to justify being left shorter than we would otherwise be.
Perhaps these niche funds may end up providing competitive returns, but if so, they could be chosen on this basis if we did not approach our investing with this bias. Otherwise, we do get to choose what we will line our nests with, and perhaps we are financially comfortable enough not to care, but for those who do care, they should be caring more about things with actual practical consequences instead of seeking to change the world in a manner without any real opportunity to do so.
Chief Editor, MarketReview.com
Ken has a way of making even the most complex of ideas in finance simple enough to understand by all and looks to take every topic to a higher level.
Contact Ken: ken@marketreview.com
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