Macro

ESG ETF Closures Hit 27 Amid GOP Backlash, Cash Flow Dip

27 ESG ETFs liquidated in the US amid increasing scrutiny and a trend of closures, with thematic ETFs also losing favor.

By Barry Stearns

5/15, 11:35 EDT
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Key Takeaway

  • ESG ETF liquidations hit 27 this year, surpassing last year's total of 36, amid a Republican-led backlash and declining cash flows.
  • Only two ESG ETFs launched in the Americas in 2023, marking the lowest introduction rate in about five years.
  • Over half of this year's ESG fund closures are actively managed ETFs, despite their potential for more flexible strategies.

ESG ETFs Under Pressure

The US market for ESG (Environmental, Social, and Governance) focused exchange-traded funds (ETFs) is facing significant challenges, with at least 27 ETFs being liquidated so far this year, according to Shaheen Contractor, senior ESG analyst at Bloomberg Intelligence. This follows 36 liquidations in the previous year, indicating a growing trend of closures in the ESG ETF space. The outlook remains bleak, particularly with increasing scrutiny and backlash from Republican-led critiques of ESG investment strategies. Contractor suggests that "Complex themes that struggle to gather assets are most at risk," highlighting the precarious position of ESG ETFs in the current market environment.

Thematic ETFs Wane in Popularity

The allure of thematic ETFs, which include sectors like clean energy and cloud computing, has significantly diminished. After a peak in interest during the pandemic, when low interest rates fueled investments in high-growth sectors, investors are now withdrawing from these funds. Nearly $4 billion has been pulled from thematic ETFs so far this year, following a $4.6 billion outflow in 2023. The shift towards more secure, high-yield cash-like instruments and the strong performance of Big Tech funds are contributing factors to this trend. Providers such as Defiance ETFs and Global X have been forced to shutter or retool their offerings in response to these market shifts.

High Rates Impact on Fund Closures

The Federal Reserve's less aggressive approach to rate cuts has prompted a reassessment of the value of high-growth, often unprofitable companies that are typical of thematic ETFs. This reassessment has led to investor pullback and an increase in fund closures. Defiance ETFs, for instance, has closed nearly half of its lineup since its inception in 2024, with the average lifespan of a Defiance ETF before liquidation being about a year. This is significantly lower than the industry average of 4.7 years. Despite these challenges, Defiance CEO Sylvia Jablonski remains pragmatic, viewing closures as a natural part of the ETF landscape.

Crypto ETFs Encounter Challenges

The cryptocurrency ETF space, particularly in Asia, has also faced headwinds. Hong Kong-listed spot bitcoin and ether ETFs saw significant outflows, with a combined $39 million withdrawn in a single day following a drop in bitcoin prices. This marked a notable shift in investor sentiment, as all six crypto ETFs reported negative flows for the first time since their launch on May 2. The tepid response to these ETFs highlights the volatility and investor caution in the cryptocurrency market, contrasting with the initial excitement surrounding their launch.

Street Views

  • Shaheen Contractor, Bloomberg Intelligence (Neutral on ESG-focused ETFs):

    "At least 27 ETFs categorized as being aligned with environmental, social and governance principles have been liquidated so far this year... The trend will likely continue, particularly if the Republican-led backlash against the investment strategy heats up." "Complex themes that struggle to gather assets are most at risk." "The sector is struggling because cash flows to ESG-focused portfolios have declined significantly and the market has matured, with most large asset managers already offering a crop of such funds." "Actively managed ESG ETFs, which tend to charge higher fees, account for more than half of this year’s fund closings... actively run funds offer the benefit of more flexible strategies, which could gain in importance as asset managers try to stand out in an increasingly competitive market."