Hidden Gem or Fool’s Gold: Can passive ESG ETFs outperform the benchmarks?

Lucie Baudoin, Mohammed Zakriya, Daniel Arenas and Lael Walsh
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Lucie Baudoin: Excelia Group | La Rochelle Business School
Mohammed Zakriya: LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique
Daniel Arenas: URL - Universitat Ramon Llull [Barcelona]
Lael Walsh: Teagasc, Dublin

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Abstract: Using a unique and extensive dataset of 121 socially responsible investing (SRI) equity exchange-traded funds (ETFs) from January 2010 to December 2020, this study examines how passive SRI ETFs perform compared with their non-SRI benchmarks composed of S&P500 ETFs. Over the full sample period, our results show that an equally weighted SRI ETF portfolio underperforms its benchmark portfolio. Notably, we do not find significant differences in the two portfolios' performance in the second half of our sample period. However, in the last two years, the SRI ETF portfolio significantly outperforms the benchmark. For the SRI investment strategies, we show that positive screening (or inclusion) rather than negative screening (or exclusion) can beat the benchmark portfolio. In particular, environmental inclusion screen provides significantly higher abnormal returns. Finally, we find that SRI ETFs' performance can be explained by increasing industry competition and declining market concentration.

Date: 2023-03
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Published in International Review of Financial Analysis, 2023, 86, pp.102540. ⟨10.1016/j.irfa.2023.102540⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04136303

DOI: 10.1016/j.irfa.2023.102540

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