Chart of the Week – July 29, 2024: Small-cap sustainable funds revisited

Observations:

A much-discussed market rotation through the end of last week has been gaining momentum in July
Higher chances of an interest rate cut in September by the Federal Reserve Bank due to better-than-expected inflation readings combined with disappointing earnings results posted last week by Tesla and heavy AI spending by Alphabet continued a much-discussed market rotation through the end of last week away from a small number of large cap technology stocks whose performance has been fueled by enthusiasm for AI and toward smaller-cap stocks. Against a backdrop of a scrambled presidential election contest, small companies, which have lagged the broader market, have been gaining momentum in July.

Whether the rotation has legs and investors should anticipate continued gains by the Russell 2000 Index remains to be seen
Lower interest rates could spur spending and give the economy further support. This, in turn, could benefit smaller companies and their future earnings. The Russell 2000 Index, which was in negative territory during the first six trading days of July, reversed course starting on July 10th. Thereafter, the index registered eight daily gains equal to or exceeding 1%, ending the week of July 25th ahead 8.6% over the month-to-date interval. At the same time, the S&P 500 was flat while the NASDAQ 100 Index recorded a narrow decline of 0.81%. Whether the rotation has legs and investors should anticipate continued gains by the Russell 2000 Index may depend on the unfolding state of the economy, interest rates and technology company earnings.

Sustainable investors who wish to invest in the small-cap market have some but still a limited number of focused sustainable fund options that are ranked
In the meantime, sustainable investors who wish to invest in the small-cap market, using a blended approach consisting of both value and growth companies, have some but still a limited number of focused sustainable fund options. Featured in an earlier Chart of the Week article published as of June 10, 2024 entitled “Limited supply of worthy sustainable small-cap funds,” the performance data covering ten available funds (the Xtrackers S&P SmallCap 600 ESG ETF closed on or about June 5 due to its inability to gain traction) have been updated to the end of June. The performance chart above covers nine funds/15 share classes, with $7.9 billion in net assets, including index tracking and actively managed funds, arrayed in order of a Sustainable Research and Analysis scoring approach that ranks funds using a scale from A (Highest ranking) to D (Lowest ranking).

Two index tracking funds qualify as the highest “A” ranked funds
Fund rankings, including index tracking and actively managed funds, are based on a screening and evaluation methodology that accounts for management company considerations, years in operations, fund size, performance track record and expense ratio. Based on this approach, the highest ranked funds include the iShares ESG Aware MSCI USA Small Cap ETF (ESML) as well as the Nuveen ESG Small Cap ETF (NUSC). These two funds are both index tracking funds that use screening well as exclusionary approaches, they are two of the largest funds in the category with at least five-year track records and are subject to low expense ratios. That said, while the base indices are the same MSCI USA Small Cap Index and MSCI’s ESG scores are used to qualify eligible securities, screening, exclusionary criteria and methods for weighting portfolio securities based on ESG scores vary somewhat.