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As documented in the "Trends in Investing Survey" reports from 2018 through 2022 by the Financial Planning Association (FPA), financial advisers have increasingly recommended and used ETFs and ESG themed assets in their clients' portfolios. However, such preference towards the ETFs and ESG assets needs to be carefully analyzed and interpreted by the financial planners and advisors to determine their suitability for client portfolios. It is in this backdrop, this paper aims to understand the behavior of a sample of three ETFs and three related ESG ETFs which are designed to track the overall US large-, mid- and small-cap markets. Daily and weekly data from September 2020 through August 2022 are used to examine and compare tracking error, premium, discount and performance of the ETFs in our sample. The results show that, on average, ESG ETFs have higher tracking errors and premium than ESG ETFs. These findings question the ability of the ESG ETFs to achieve pricing and tracking efficiency compared to their corresponding core ETFs. On a risk-adjusted basis, core ETFs have delivered better performance than their ESG counterparts. Also, Small-cap ETFs, both core and ESG themed, have achieved best risk - adjusted returns followed by the mid- ap ETFs and then, the large-cap ETFs. Compared with the benchmark returns, no ETFs in the sample were able to achieve significant abnormal returns. The findings of the paper would help financial advisers ensure compliance with suitability while giving investment advice to their clients that are interested in adding ETFs and ESG assets in their portfolios.
Keywords: Exchange Traded Funds, ESG Funds, Premium and Discounts, Tracking Errors, Financial Advising
JEL classifications: G01, G21
(ProQuest: ... denotes formulae omitted.)
1.Introduction
Financial Planning Association (FPA) in conjunction with Journal of Financial Planning publishes "Trends in Investing Survey" with survey responses from financial advisors and planners on an annual basis. The survey asks several questions attempting to identify current trend in investing among the advisors and planners. The questions asked to the respondents include 1) which investment vehicles do you currently use/recommend with your clients? 2) which investment vehicles do you expect to increase your use/recommendation of over the next 12 months? And 3) which investment vehicles do you expect to decrease your use/recommendation of over the next...