Premium, tracking errors and performance of iShares Core versus ESG S&P ETFs

Abstract

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 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 errors, premium, discount and performance of these ETFs. 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 making investment advice to their clients that are interested to add ETFs and ESG assets in their portfolios.