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Generating A Sharpe Ratio Of 3 With ESG ETFs

The recent announcement from BlackRock related to a massive expansion of their ESG offerings inspired us this week to take a look at some of the current vehicles offered to investors.

There is currently more than $10billion in the 14 iShares ETFs offered in the US, according to, and the spectrum of vehicles ranges from Corporate Bonds to Emerging Markets. It is also notable that the growth is fueled not just through performance but the overall interest in the ESG investing from all kinds of investors, large and small.

When we put a few of iShares ESG ETFs on a chart, and compare them to the S&P500 (the dashed blue line), only one of them stands out performance-wise: the Global Clean Energy ETF (light blue, clearly dominating the chart). 

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The others are pretty contained in their performance results. While it’s clear that ESG investing is here to stay, when investors look at their results and see that many ESG strategies are underperforming, would that lead them to reconsider their allocation decisions? This will not necessarily mean a return to “socially irresponsible” investing, of course, just the inclusion of a wider set of opportunities that do not specifically label themselves as ESG-focused.

In the meantime, the opportunity set in ESG is quite diverse, and allows investors multiple choices for building portfolios with excellent risk-adjusted returns. Here is an Efficient Frontier plot for the sample above:

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The most efficient risk/return portfolio from this frontier achieves an impressive annualized Sharpe Ratio of 3.34 and has other notable stats (the points are numbered from bottom left to top right, and there are 20 of them plotted on the chart; we only show stats for the first 6):

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With the amount of money pouring into these kind of investments and a growing number of vehicles to choose from, there will be even more “ingredients” for interesting portfolios to be built. And, we think it also creates pressure on companies to try to get onto the ESG bandwagon and make themselves appear suitable for this segment. If these efforts genuinely mean improvement in the way the companies operate (not just a few gimmicks to slap on the label), such changes are quite welcome. We will keep an eye on this growing sector.

Dmitri Alexeev is Founder and CEO of AlphaBot, a collaborative platform for alternative investment research.

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