Are socially responsible exchange-traded funds paying off in performance? |
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| Authors: | Ya Dai Liang Guo Steve Liu Hongxian Zhang |
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| Institution: | 1. School of Accounting, Finance, Information Systems, and Business Law, College of Business, Western Carolina University, Cullowhee, North Carolina, USA;2. Department of Accounting & Finance, Jack H. Brown College of Business and Public Administration, California State University, San Bernardino, California, USA;3. Department of Finance, College of Business, University of Rhode Island, Kingston, RI, USA;4. Department of Business and Information Technology, Kummer College of Innovation, Entrepreneurship, and Economic Development, Missouri University of Science and Technology, Rolla, Missouri, USA |
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| Abstract: | This study examines the Socially Responsible (SR) exchange-traded funds (ETFs) by comparing their risk-adjusted performance with a matched group of conventional ETFs in the U.S. equity market. In contrast to prior studies that focus on actively managed mutual funds, we find that the risk-adjusted returns of SR ETFs are significantly lower than those of conventional ETFs during the 2005–2020 period. Such underperformance is only observed in non-crisis periods but not in economic crisis periods (i.e., the 2020 pandemic recession and 2008 financial turmoil). We attribute the observed underperformance of SR ETFs during the non-crisis periods to their limited diversification of unsystematic risks resulting from various negative or positive screens employed in the funds. We also find that net fund flows of the SR ETFs are less sensitive to past negative performance than are conventional fund flows. Collectively, our findings suggest that, instead of seeking wealth maximization, socially conscious investors may choose SR ETFs to gain non-economic utility. |
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| Keywords: | exchange-traded fund fund flows portfolio performance socially responsible investing |
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