SRI Performance Remains a Bright Spot for Robos

Posted on February 23, 2021

SRI or ESG investing remains a hot trend in the investment industry. At Backend Benchmarking, we compare the equity performance of the SRI/ESG options and the standard options at the same robo advisor to analyze their differences. 

SRI Performance

New to the Report this quarter is our M1 Finance SRI portfolio. It made a strong initial impression, placing first over the fourth quarter for total portfolio performance compared to the Normalized Benchmark. It was also fourth for equity-only performance over the quarter. Many of our SRI portfolios hold a blend of standard and ESG-themed ETFs, while M1’s SRI portfolio holds entirely ESG-themed ETFs. 

Backend Benchmarking also holds standard and SRI portfolios at the following eight providers: Betterment, E*Trade, Ellevest, Merrill Edge, Morgan Stanley, TD Ameritrade, TIAA, and Wealthsimple. When analyzing SRI portfolios, it is best to focus on the equity holdings, as many of the SRI-themed portfolios do not hold SRI-specific bond funds.

Over the 2-year trailing period, the equity holdings in every SRI portfolio except E*Trade’s outperformed the standard counterpart at the same provider. The widest margin of outperformance was at Wealthsimple, whose SRI portfolio saw its equity holdings outperform the standard option by over 7% annually. 

Reasons for Outperformance

The reason for this is that the standard option, of Wealthsimple, has minimum volatility funds that have a value tilt while the SRI option is more neutral. It is difficult to pinpoint exactly why SRI is outperforming. One factor is that SRI often excludes fossil fuel and many energy companies, which have lagged over the past two years, and has more exposure to technology companies that often fall under the SRI umbrella.

Additionally, the equities in the SRI portfolios we track tend to be modestly tilted more towards growth than their standard counterpart. Six of the SRI portfolios hold between 3% and 5% more growth equities than their counterparts. Growth has significantly outperformed value over both the 1-year and 2-year periods making even this slight tilt towards growth a component of recent outperformance.

Over the 2-year trailing period, SRI portfolios are filling up the leaderboards. Wealthsimple SRI and Merrill Edge SRI placed first and second, respectively, for performance compared to the Normalized Benchmark. For equity-only performance, Morgan Stanley SRI placed first and Wealthsimple SRI placed second.

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