Associate ESG with attractive market opportunities
Investors who focus on domestic equities and related environmental, social and governance (ESG) exchange-traded funds may be inclined to believe that substantial allocations to growth stocks are the only way to realize ESG benefits.
However, there are ways to associate value stocks with ESG benefits. Some domestically focused ETFs do, but investors looking for this combination have attractive options with international stocks, including the SPDR Bloomberg SASB Developed Markets Ex US ESG Select ETF (RDMX).
RDMX, which tracks the Bloomberg SASB® Developed Markets ex US Large & Mid Cap ESG Ex-Controversies Select Index, helps investors reduce home country ESG bias while adding international diversification benefits to their portfolios, But the benefits of ETFs don’t stop there.
“Compared to US equities, international developed market equities have enjoyed a relative value advantage for some time. For example, the Bloomberg SASB Developed Markets ex US Large & Mid Cap ESG Ex-Controversies Select Index has a 12-month price/earnings (P/E) multiple of 11.8 compared to the S&P 500 Index of 18 .2,” said Michael Arrone, State Street’s chief investment strategist.
Indeed, international developed market stocks have long been cheaper than their US equivalents, but RDMX is an indication that investors can embrace ESG without having to take on excessive allocations to growth stocks – which can be difficult to achieve. accomplish with many national ESG ETFs. Additionally, RDMX may offer some overlooked benefits.
“What is perhaps less well known to investors is that international developed market equities generated higher earnings growth than U.S. equities during the second quarter earnings season,” Arrone added.
Yet many U.S. investors are loath to consider foreign stocks, ESG or otherwise, simply because the group has long tracked the S&P 500 in terms of total return. This is a valid reason, but the situation will not last forever. In fact, rising interest rates in the United States could set the stage for RDMX to become an attractive option for investors.
“However, a new catalyst could emerge to propel international developed market equities higher. The US dollar has climbed more than 11% year-to-date, creating a headwind for international developed market equities” , Arrone concluded. “Consistent with previous Federal Reserve (Fed) monetary policy tightening cycles, the dollar rose in anticipation of higher interest rates and during the early stages of the tightening cycle. As the cycle matures, the dollar often begins to weaken.This could be the catalyst that equities in international developed markets need to improve their performance.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.