Why ETF issuers are switching core ETFs to ESG indices

Amundi and DWS have both done this over the past two months

Tom Eckett

a row of wind turbines

ETF issuers in Europe are starting to change the indices on core ETFs to environmental, social and governance (ESG) strategies in a bid to have more success in the sustainable space.

Over the past two months, Amundi has decided to no longer offer investors exposure to the FTSE 100 opting instead for an ex-fossil fuels UK index while DWS has changed the index on its FTSE All Share ETF to track the MSCI UK IMI Low Carbon SRI Leaders Select index.

The French asset manager’s decision comes after the FTSE 100 ETF captured just $10m assets since launching in September 2016 highlighting the difficulty of having success in the core space.

DWS also found this out the hard way with its FTSE All Share ETF which had just $36.8m assets under management (AUM) by the time the index was changed in early December. This is compared to the SPDR FTSE UK All Share UCITS ETF (FTAL) which has $658m AUM.

For the larger ETF issuers, having a core range is important as part of being a one-stop-shop for investors in order to ensure clients do not flee to rivals.

However, capturing any significant inflow for the new core ETFs is a significant challenge with the older strategies holding billions of assets and therefore can offer low fees and narrow bid-ask spreads.

At the other end of the spectrum, ESG is arguably the biggest trend in not only the ETF space but the whole of finance right now.

ESG ETF assets in Europe have exploded this year with investors piling €22bn into these strategies so far this year, as at the end of October, according to data from Morningstar.

Recognising the demand, issuers have been launching ESG ETFs at a rapid rate with more than half the ETFs in Europe launched this year employing an ESG tilt.

This increasing investor demand for ESG strategies as a core holding is a key reason why ETF issuers are shifting away from unsuccessful core ETFs.

Amundi has also used the switches as an opportunity to clean up their ETF range. For example, in October, the ETF issuer moved its $904m physically-replicated S&P 500 ETF to track the S&P 500 ESG index.

Following the Global Financial Crisis (GFC), issuers with synthetic ETFs came under pressure to launch physical versions of the same strategy.

With investors softening their stance on synthetic replication, Amundi has used this as a chance to remove duplicates in its suite.

Expect the likes of Lyxor and DWS, which have similar duplicates in their ranges, to follow suit in the coming months.

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