Earth-First ETFs Are Soaring

These five exchange-traded funds should deliver big rewards.

- NELLIE S. HUANG

GREEN STOCKS WEREN’T THE ONLY investments that had a scorching year. Funds that invest with sustainability in mind sizzled, too. Some posted triple-digit returns over the past 12 months. Investors followed the money and poured more than $50 billion in 2020 into sustainable funds—mutual funds and exchange-traded funds that have a sustainability objective or that use environmental, social and governance measures as binding criteria for picking securities. That’s more than double the record set in 2019. And it represents 24% of overall inflows into U.S. stock and bond funds for the year.

In other words, sustainable investing hasn’t just arrived; it’s taking over. Though in 2020 investors pulled more money from U.S. stock funds than they put in, those outflows were offset by inflows into sustainable funds. “Investors pulled money from U.S. equity, sector-equity, international-equity and allocation funds in 2020, but added money to sustainable funds in each of those category groups,” says Jon Hale, head of sustainability research at Morningstar.

And green funds, which emphasize climate, environmental and renewable-energy themes, were among the most popular choices. Four of the top 10 sustainable funds with the biggest inflows in 2020 were focused on renewable energy. “Some of this is, unfortunately, performance-chasing,” says Jon Hale, head of sustainability research at Morningstar. “But with the new administration emphasizing climate change and the transition to a net-zero economy,” he adds (referring to President Biden’s goal for the country to balance the amount of green-house gas produced and the amount removed from the atmosphere by 2050), “I expect investor interest in these funds to continue.”