New ETFs focus on ESG factors

Performance potential

Climate change is a reality. Yes, there are a few doubters still around, just as there are flat-earthers. But most people now accept that something unusual and potentially catastrophic is happening to our world, and the window for acting is closing rapidly. A number of investors have written to me recently asking what they can do in terms of placing their money with climate-friendly industries. Fortunately, there are a growing number of alternatives available.

“I am of the mind that things are moving much faster than we realize and very soon fossil fuels and all related industries will be stranded assets,” one reader wrote. “I think more focus on sustainable investments might be of some use for those of us who see the writing on the wall. When the auto industry is rapidly moving to electric and hydrogen and abandoning gasoline and diesel power, they likely know something the rest of us are ignoring.”

Sustainable development doesn’t just involve the energy sector. The recently-released final report of the federal government’s Expert Panel on Sustainable Finance contained 15 recommendations for encouraging capital flows, risk management activities, and financial processes that incorporate environmental and social factors as a means of promoting sustainable economic growth and the long-term stability of the financial system. The report is available on the Government of Canada website.

But these proposals are for the future. Where should climate-conscious investors look now for securities that are both environmentally friendly and potentially profitable? Here are some new ETFs you may want to check out.

Horizons Global Sustainability Leaders Index ETF (TSX: ETHI)

This ETF, launched last October, invests in a portfolio of large-cap companies that are global climate change leaders (as measured by their relative carbon efficiency), and are not engaged in activities that are inconsistent with responsible investment.

The fund seeks to replicate the performance of the Nasdaq Future Global Sustainability Leaders Index, hedged to Canadian dollars.

Top holdings include Mastercard Inc. (NYSE: MA), Visa Inc. (NYSE: V), Home Depot Inc. (NYSE: HD), Apple Inc. (NSD: AAPLE), and Roche Holding AG (SWX: ROG). Over 73% of the assets are in the U.S., with almost one third in the technology sector.

The fund’s opening net asset value was $25 per unit. It was trading recently at $28.31, and investors have received two quarterly distributions totalling about $0.065. That’s a total return of 15.8% in less than a year. The management fee is 0.65%.

AGFiQ Enhanced Global ESG Factors ETF (NEO: QEF)

AGF Investments started this fund in February 2018. It takes an active approach to investing in companies with strong ESG (environmental, social, and governance) profiles.

The portfolio is more balanced than that of the Horizons fund, with 17.8% in financials (e.g., Toronto-Dominion Bank), 21.1% in information technology (Microsoft, Apple, Alphabet), and 10.6% in healthcare (Abbot Laboratories, Gilead Sciences). Just over half the portfolio is in U.S. stocks. The fund is hedged back to Canadian currency.

This ETF got off to a slow start, but year to date to July 31 it has gained 11.2%. The units trade on the new NEO exchange and volume tends to be very low. The MER is 0.45%.

Mackenzie Global Leadership Impact ETF (NEO: MWMN)

This ETF also trades on the NEO exchange. It too is a global fund, launched in 2017. The focus is on companies that “make a social impact with competitive returns” and include women in leadership positions.

As of July 31, about two thirds of the assets were in U.S. stocks (Microsoft and Estee Lauder are among the top holdings). Financials are the dominant sector at 21.5% of assets followed by information technology at 15.2%.

Like the AGF entry, this one struggled in 2018, ending with a small loss. But so far this year, it is ahead more than 15% on a net asset value basis. The MER is 0.68%.

Other choices to keep an eye on

In February, Desjardins launched two ETFs that invest in global securities that aim to reduce carbon dependency. They are the Desjardins RI Global Multifactor - Fossil Fuel Reserves Free ETF (TSX: DRFG) and the Desjardins RI Emerging Markets Multifactor Low CO2 ETF (TSX: DRFE). Both these funds are very small and have been around for only a few months. The company has not yet published the content of their portfolios, so we’re flying blind at this point. But they may be worth keeping an eye on as they mature.

If you prefer a single stock to an ETF or mutual fund, take a look at Brookfield Renewable Partners (TSX: BEP.UN). It owns a portfolio of renewable energy producers, mainly hydro but also wind and solar. The shares have gained 26% year to date and have a yield of 6.1%. (Disclosure: I own shares in BEP.UN)

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website. This article originally appeared in The Toronto Star.

For more information on subscriptions to Gordon Pape’s newsletters, check the Building Wealth website.

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Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.