5 types of anti-ESG funds: But do they have staying power?

Vice funds, which include "sin stocks” – concentrated in alcohol, tobacco, weapons and gambling, have the longest track record and remain a key approach for anti-environmental, -social and -governance investors.

Photographer: Michael Nagle/Bloomberg

As sustainable and environmental, social and governance (ESG) investing has come under increasing criticism, an emerging category of investments that offers an alternative has gained some traction. Anti-ESG funds have experienced growing attention during the past few quarters, after years of muted demand and losses prior to the second half of last year, according to an analysis by Morningstar.

Such funds reached $2 billion in assets during the first quarter of this year, with flows into anti-ESG funds peaking at $376 million during the third quarter of 2022, the firm said. Strive Asset Management’s first fund – Strive U.S. Energy ETF – accounted for more than 80% of anti-ESG inflows, attracting nearly $100 million during its first week and more than $300 million during its first month.

The full report, Anti-ESG Funds Make Noise. Here’s What They Look Like, revealed some surprises among anti-ESG funds, including that while they tend to have a higher level of exposure to controversial industries such as weapons and fossil fuels, some also have strong exposure to positive environmental impact, including climate action, healthy ecosystems, resource security and human development.

However, whether anti-ESG funds will have staying power remains to be seen. Morningstar noted that Strive’s subsequent fund launches attracted only about $5.5 million each month since inception and that after just one year on the market, anti-ESG fund Capital Constrained ESG Orphans ETF recently filed with the Securities and Exchange Commission to liquidate.

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Morningstar identified 26 funds in its universe that can be considered anti-ESG and grouped them into five categories based on prospectus language and marketing materials. It characterized the funds as a ‘young and disparate bunch,’ with most having launched within the past year. Almost all of the funds in its anti-ESG sample are equity funds, and most of those are concentrated in domestic large-cap stocks. With the exception of one open-end offering — USA Mutuals Vice — all anti-ESG funds are exchange-traded funds (ETFs).

Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM’s Retirement Advisor magazine and LifeHealthPro online channel.