Performance Attributes of Environmental- Social- and Governance Exchange-Traded Funds

Abstract

Recently interest in socially responsible investing has grown including new investment vehicles such as environmental social and governance exchange-traded funds (ESG ETFs). Despite their rising popularity few studies have attempted to examine the performance characteristics of these stylized funds. This study aimed to fill this knowledge gap by elaborating on the performance attributes of ESG ETFs and examining fund managers' security selection and market timing skills. Our results suggest that these funds generally underperform relative to conventional ETFs in many aspects. Additionally the market timing skills of fund managers require improvement but are comparable to those of conventional ETFs. These results are robust to selecting the individual funds and alternative indices used in the sample. Furthermore both the security selection and market timing skills of ESG ETF managers deteriorated significantly during the COVID-19 pandemic. Finally the results indicate a slightly weaker cointegrated relationship between ESG ETFs and their benchmark indices when compared to conventional ETFs suggesting that potential investors in ESG ETFs should carefully inspect the funds to make informed decisions.