Monday, May 3, 2021

The price of indulgences, 2021


Source. My correspondent provides the answer: 

5bps: IVV (column #3) (iShares Core S&P 500 ETF)

15bps: ESGU (column #1)  (iShares ESG Aware MSCI USA ETF) 

30bps: LCTU (column #2) (BlackRock U.S. Carbon Transition Readiness ETF) “Sea change” quote from BlackRock here 

I have not independently checked, though the answer hardly matters. The fees and portfolios tell the story. Obviously any claim that this ESG portfolio will outperform after fees is ... strained. 

When I did my Senate testimony on financial regulation and climate change, someone (I forget who)  suggested that financial regulators need to really crack down on ESG, carbon, diversity, and other virtue claims by investment managers and large corporations. I heartily agree. Of course, we have different motivations.  I got the sense that the person suggesting it wanted to make sure companies really did keep all their virtuous promises. I think that being forced to document their virtue, with criminal penalties for securities fraud hanging in the balance, would show just how empty this whole exercise is. 

Update: To be clear, I'm all for the free market. If people want to pay 30 bps for glossy feel-good marketing materials (click the above link) attached to their S&P500 fund, more power to them and the producers of such materials. Of course, central banks who have spent 30 years bemoaning "bubbles," "overpricing" "speculative enthusiasms" might not want to be piling on to such efforts. Again. 


  1. Hoping someone makes a class action suit against stock brokerages on behalf of all 401k investors for failing "[to act] solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them" by investing in these scam virtue stocks.

  2. The 30-bp ETF is a 15-bp ETF until June 2024.

    BlackRock iShares have an ETF for every niche. If your thing is ESG, they have an ETF for it. Etc. It is a feature, not a 'bug', of the free market doctrine.

    Caveat emptor, as well. Call it the generation gap (in understanding).

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  5. Correct me if I am wrong...

    About 27.4% (sum of percentages above) of all new money invested in these "broad diverse funds" would be directed towards 12 of 500 (2.4%) of companies.

    "According to the University of Cambridge’s bitcoin electricity consumption index, bitcoin miners are expected to consume roughly 130 Terawatt-hours of energy (TWh), which is roughly 0.6% of global electricity consumption. This puts the bitcoin economy on par with the carbon dioxide emissions of a small, developing nation like Sri Lanka or Jordan."

  6. I am huge fan of your blog, John. Here is evidence to support your hypothesis: and and

  7. In today's The Wall Street Journal (5/4/21) an article titled "Deluge of Debt Is Tied to Carbon Emissions and Diversity" describes a recent development in bond issuance and loan origination whereby the issuer or borrower promises to pay a higher rate of interest if it fails to achieve certain progress milestone targets to reduce GHG emissions or to increase workforce 'diversity' measures.

    The article ends with this critical assessment from one fund manager:
    "If you want to reduce your own carbon footprint, you’re not going to ask your mortgage provider to give you a discount for doing it,” said Jonathan Butler, London-based co-head of global high-yield at PGIM, the fund management arm of U.S. insurer Prudential Financial. “This is effectively just a backdoor way of private equity reducing their margins [on borrowing costs].”

  8. And here's another one, making a very related claim:

  9. "Bidenomics Takes Root in Europe’s Economically Fragile South -- Italy, Spain and Greece plan to revamp their economies. If it doesn’t work, a mountain of debt could revive eurozone tensions." -- The Wall Street Journal (May 4th edition, 2021).

    MMT comes to the eurozone. In a real-time experiment, eurozone countries Spain, Italy, and Greece, intend to ramp up spending on infrastructure to promote economic growth; their governments intend to raise their nations' indebtedness to fund those expenditures.

    This will provide an opportunity for real-time evaluation of the fiscal theory of the price level for proponents of that theory.

    Economics suffers from the absence of controlled conditions in experimental settings. Other scientific disciplines can achieve controlled conditions with relative ease. Economics cannot do so with a comparative level of ease, and so its theoretical underpinnings are more open to challenge from critics and its theories are less robust and less useful to the real-world decision-maker.

    Running large scale macroeconomic experiments such as those announced by the governments of Spain and Italy and Greece should be welcomed by macro economists for the experimental opportunities alone. If the results of the experiments debunk MMT, so much the better.

  10. Hmm. Seems like we're getting well beyond puffery in terms of material disclosures. If your commenters can find the supporting data in a flash, where is the SEC? And fiduciaries...? They're off to see the wizard.

  11. The goal of these particular* ETFs is to weed out what are perceived to be the worst offenders of "ESG" principles -- civilian gun manufacturers, strip mining, etc. -- for people who are just morally opposed to those sorts of activity. But almost by definition those are not going to be the largest companies in the S&P 500, so if you only compare the top holdings you won't see much difference. And to be fair, 10 bps strikes me as about right for that limited scope (10 bps is VERY cheap in absolute terms).

    *There are ESG ETFs that promise go further, but those aren't the ones in the example.

  12. The ETFs are labelled incorrectly; Column 1 is ESGU (15 bps), Column 2 is IVV (3 bps), and Column 3 is LCTU (15 bps). The two 15 bps funds have screened out controversial and civilian weapons and tobacco, while the LCTU has also removed nuclear weapons. Looking at just the top10 is a bit misleading - so many of the mega-cap tech companies score highly on ESG, since most people just look at the E and tech companies can point towards their green energy purchases/etc.

    I don't get the ESG hate (nor the ESG love, for that matter). If people want to spend a few bps to feel better about their investments, who cares?

    1. Yeah, it's hard to understand why anyone would be offended by the two specific ESG ETFs at issue. Start with the S&P 500, remove a few things people are morally opposed to, charge a small 10 bps premium for the added service. Seems fine?

      That said there ARE some very dumb ESG products out there... they just aren't the ones being picked on here.

    2. I take issue when people are coerced into investing into them by their virtue signaling company/brokerage through their 401k by being told they have to invest in them if they want to participate or by not being given an option to just invest in a simpler 500 index.

    3. LAL: this would be a huge problem... but I don't think it actually happens?

      What your "virtue signaling" employers will sometimes do is make ESG the DEFAULT setting for investments, requiring employees to log into their accounts and change the settings. This matters, because it turns out a shocking percentage of folks just take the defaults.

      Now that's arguably bad in and of itself, just not nearly as bad as what you've suggested happens.


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