ETFs´ adequacy to new era boosts ESG revolution , says Fonditel CIO

Eugenia Jiménez
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ETFs´ adequacy to new era boosts ESG revolution , says Fonditel CIO

While the number of exchange traded funds (ETFs) adhering to environmental, social, and governance (ESG) principles is growing in population terms, some fund selectors fear these passive strategies could face headwinds depending on regulatory developments.

Fernando Aguado, CIO at Madrid-based investment firm Fonditel, said: "We believe this could be an upcoming scenario for ETFs in some niche markets on which the underlying asset's liquidity is lower. The great volume of some ETFs, - which provide liquidity on a daily basis - , could induce investors to a false impression of liquidity and depth, which does not normally correspond with the real features of the underlying asset.

"Some asset classes that could exemplify this scenario could be high yield, corporates, emerging market bonds, or volatility. The January 2018's flash crash on short volatility strategies could also serve as a reminder.

Some of these products could be systemic and we already know how much the regulator likes these risks."

Aguado believes that the importance of adhering ESG principles to investment portfolios is a trend on ongoing (and unstoppable) growth that will possibly have an impact on ETFs too. He thinks this trend will be aligned with a potential shift in institutional investor demand (towards socially responsible strategies), a higher awareness from the retail sector, and a harder regulatory framework on the subject than the one currently in place.

"All these factors will lead to a decreasing interest from both institutional and retail investors in "traditional" ETFs since this new era of passive vehicles (ETFs and index products) incorporating ESG criteria will attract a greater interest from both old and new investors.

"We also believe that the ETF & index product industry will continue growing as a whole."