ETF Edge

Watch out for this trend in ESG investments, Wharton's Jeremy Siegel warns

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It's worth being "very careful" when approaching certain ESG investments.

So says Jeremy Siegel, professor of finance at the University of Pennsylvania's Wharton School, about the growing interest in investing based on environmental, social and governance, or ESG, which many now see as synonymous with sustainable, socially responsible investing.

While that's not exactly the case yet — some ESG funds still contain the stocks of companies with spotty records on environmental issues, for example — Siegel's bigger worry is that buyers could bid up ESG funds to unsustainable levels (no pun intended).

"One has to ... be very careful," Siegel told CNBC's "ETF Edge" on Monday. "I've seen ... studies about outperformance of some of these ESG stocks historically, but remember: if everyone's moving to them, that causes outperformance, but if it leads to too-high valuation, it leads to long-term underperformance."

Some investors may have learned that lesson with the advent of bitcoin, the price of which skyrocketed to north of $20,000 per coin in 2017 before falling back to the $8,000 level. The digital currency was trading near the $9,785 level on Friday, down about 48% from its late-2017 peak.

And while sustainable investing, which has been around for decades, is likely a more stable bet than bitcoin, Wall Street's tendency to overvalue certain fads hasn't exactly disappeared, Siegel said.

"You've got to be really careful of that and very wary of saying, 'Oh, in the past, these have done well and they've come up recently, people are buying them,' and then saying, 'Oh, that means it's going to do well in the future,'" Siegel warned.

The iShares ESG MSCI EAFE ETF (ESGD), which tracks international ESG-friendly stocks and is one of the largest ESG ETFs on the market in terms of assets, according to ETF.com, peaked in early 2018. Since its 2016 launch, the $1.6 billion fund has climbed nearly 30%, but hasn't recaptured its previous all-time high.

After a strong 2019 for ESG products, however, other funds — including Xtrackers MSCI USA ESG Leaders Equity ETF (USSG), which launched last March and has attracted almost $1.8 billion in net assets — are steadily rising.

"In the ESG conversation we have with all the financial advisors we talk to across the country, it's that next generation" driving the gains, Jeff Kilburg, founder and CEO of KKM Financial, said in the same "ETF Edge" interview. "It's those millennials. They want to be invested in ESG."

That could be a big part of what's helped sustainable investing become a $30 trillion global market over the years, and, for Kilburg, it's a major part of what will drive it even higher.

"We don't know the structure, it's very loose right now, but they want to be invested, so, I think it is going to continue to grow exponentially over the next five to 10 years," he said.

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