The Performance of ESG ETFs in the U.S.

Research Question: ESG ETFs may serve noble purposes of investors. However, do they help them gain material financial returns? This paper seeks to answer this question by examining the performance and performance persistence of the ESG equity ETFs in the U.S. Motivation: This study has been motivated by the strong interest in ESG investments, and particularly in ESG ETFs. This interest is evidenced by the billions of dollars which are invested in relevant financial products worldwide. Idea: A common belief among many investors is that ESG investing requires a level of sacrifice in terms of financial returns. In this study, we examine the idea of the “waived” financial returns is the case for ESG ETFs. Data: The sample includes 61 ESG equity ETFs traded in the United Sates. The study period spans from 1/1/2019 to 31/12/2021. Method/Tools: Performance and performance persistence is examined with standard methodology, which includes the single-factor market model, the Fama-French-Carhart six-factor model and risk-adjusted metrics, such as the Sharpe and Treynor ratios. Findings: The findings show that, in raw return terms, the average ESG ETF outperforms the S&P 500 Index, even though there are several funds in the sample which do not do so. Moreover, about 16% of the examined ESG ETFs (10 out of 61 ETFs) offer positive and significant alphas. The average term of these significantly positive alphas is 7 bps and are obtained via the multi-factor performance regression model but not via the single-factor model. With respect to persistence, daily returns display a reverting behavior. This pattern applies to weekly returns too, but with less statistical significance. Contributions: Sustainable investing with mutual funds has drown significant interest by researchers. However, ESG ETFs are under-researched. We aim at fulfilling this gap in the literature. In addition, the results obtained are quite encouraging to investors. In some cases, ESG ETFs in the U.S. are found to outperform the market index in some cases. This finding implies that, from a financial perspective, ESG investing is not an a priori lost cause, as it is frequently considered to be