The SPYX ETF is a Cheap Way to Get into ESG and Delivers a Better Performance Than the S&P 500 Too

Have you ever been stopped by a building? This building literally stopped me in my tracks as if it was trying to tell me something. It is the Oasis Hotel Downtown in Singapore with its entire 27-floor external facade wrapped in a natural vine-covered sunscreen. It also has four lush sky terraces, but these are not only for decoration purposes or demonstration of some green slogan, but serve some real purpose as they allow for good cross ventilation in a mostly hot tropical country and ultimately reduce overall energy cost.

Source: gettyimages.com

There are other green buildings around the world that have adopted principles of circularity, using recycled materials and green technologies for building design. These show us that ESG (Environmental Social and Governance) principles are not just about replacing fossil fuels with renewables or electrifying the whole fleet of internal combustion engines to electric vehicles or EVs. Neither is it just about investing massively in solar panels, whose production has often been highlighted by ecologists as being highly carbon-emitting due to the factories which produce them consuming coal.

For this matter, ESG is also about achieving better energy efficiency and cutting down on stocks that own oil reserves, instead of heavily relying on the success of solar or wind stocks at generating more revenues. For this particular purpose, there is the SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX), one of SSGA’s thematic ESG funds.

The SPYX

The ETF tracks the S&P 500 Fossil Fuel Free Index, whose objective is to allow climate change-conscious investors to align the core of their investment strategy with their values by eliminating companies that own fossil fuel. Consequently, the main holdings which find their way in SPYX’s portfolio are the U.S. large-cap equities like the big tech names as per the table below.

Source: ssga.com

Additionally, the lists also include companies operating in the Financials, Healthcare and Consumer Discretionary, Material, and Industrial sectors. There are also REITs. Further down the list of the fund’s 489 holdings (of which just 23 are shown above), there are energy plays and utilities too, but which do not own fossil fuel or coal reserves for chemical byproducts, residential use, or pharmaceutical purposes. There is also Marathon Petroleum (MRP) which provides exposure to oil refining but has also entered into a joint venture for the production of soybean oil.

Better performance compared to the S&P 500 despite excluding oil giants

Oil giants with reserves are excluded from SPYX as the environment increasingly starts to surface during shareholders’ meetings of energy companies. At the same time, more stringent measures are continuously being applied by the U.S. authorities to tackle the climate change problem which has resulted in billions of dollars of losses in the last five years.

Now, to be realistic, policy decisions especially those related to renewables are subject to change with the different Presidential administrations and this may lead some investors to doubt the long term success of SPYX, especially given the fact that it relies on corporations’ green mandates instead of investing in building up solar capacity like the Invesco Solar Portfolio ETF (TAN) which bears an expense ratio of 0.66%.

Well, a look at the chart below shows that not only that the SPYX (in blue) has outperformed the SPDR S&P 500 ETF (SPY), with the gain in performance gradually increasing over the last five years, irrespective of what U.S. President was in charge.

Source: Trading View

Scanning the industry, there are other ETFs adopting the same strategy like the Etho Climate Leadership U.S. ETF (ETHO) which has produced roughly the same five-year gain as SPYX, but, the former charges an expense ratio of 0.4%. On the other hand, SPYX charges just 0.2% and suffers from relatively less volatility.

The rationale for SPYX instead of investing in individual names

Each of the fund’s holdings has its own way of contributing to the reduction in the use of fossil fuels with many having committed to carbon neutrality by 2050 as part of the United Nations Framework Convention on Climate Change.

While for Tesla (TSLA), its electric vehicles are proving handy to replace internal combustion vehicles consuming fossil fuels, Amazon (AMZN), through its online market place helps to reduce carbon footprint by enabling people to purchase goods without having to make the move to distant stores. As for Pfizer (PFE), it has a climate action plan aimed at obtaining sustainable energy accreditation for its administrative office buildings and using renewables.

Finally, even if you are a dedicated activist ESG investor, it will take considerable time to screen the list of 2400 names on the NYSE to choose an appropriate one. In this context, SPYX composed of essentially the same stocks as in the S&P 500 index funds, except for fossil fuel reserves owing ones, constitutes a valid option unless you have already zeroed in on a particular “green” name.

Disclosure: I am long Apple. This is an investment thesis and is intended for informational purposes. Investors are kindly requested to do additional research before investing.