Aussie investors sour on this ETF

It’s no secret that ETFs have been a front runner asset class for most investors in the last few years. Vanguard Australia, the country’s leading provider of ETFs saw record net inflows of $1.8 billion during April (+20% from previous month), despite heightened market volatility triggering mass market selloffs.

Within an overall positive environment, there are always clear winners and losers – and the results might be surprising.

Figure 1: ASX ETFs with largest outflows (AUD millions). Data as of 31/03/2025.

Figure 1 illustrates the top five ASX-domiciled equity ETFs that investors have recently retreated from (12 months to 31 March 2025).

Despite positive share price performance, BetaShares Australian Sustainability Leaders ETF FAIR comes out the clear loser, with eye-watering $432 million in net outflows, leaving $1.07 billion in net assets.

How are sustainability ETFs faring?

Geopolitical challenges and intensifying environmental, social, and governance backlash, has led to a withdrawal of interest in ESG. Surprisingly, Aussie investors have shown ongoing optimism with positive net flows of around USD 305 million in Q1 of 2025.

Figure 2: Australia and New Zealand sustainable fund flows (USD Billion).

Figure 3: Quarterly Global Sustainable Fund Flows (USD Billion).

Our quarterly ETFInvestor market data shows that popular options like BetaShares Global Sustainability Leaders ETF ETHI and Vanguard Ethically Conscious International Shares Index ETF VESG, continue to dominate with 1-year positive net flows of $287m and $114m (1 year to March 2025) respectively.

Investors appear to sour on this ETF

It seems the recent optimism Aussie investors are showing for sustainable funds isn’t translating to BetaShares Australian Sustainability Leaders ETF FAIR.

Coined as an acceptable option for genuine exposure to domestic ESG-focused equities, the ETF receives a Neutral Morningstar Medalist Rating, due to its structural deviation from broader market composition which compromises its overall investment appeal.

Methodology

In collaboration with Nasdaq, Betashares crafted an index methodology in 2017 to account for ESG concerns, termed the ‘Nasdaq Future AU Sustainability Leaders’. FAIR tracks this index using a float-adjusted market-cap-weighted approach.

The index tracks a set of ASX companies engaged in sustainable business activities, identified as “Sustainability Leaders;” and excludes companies with material negative impacts on people, communities or the environment; avoiding exposure to the fossil fuel industry.

The eligibility and selection rely on the Responsible Investment Committee that dictates thresholds and exceptions. The methodology delivers a portfolio firmly aligned with responsible investment considerations.

Companies with the capacity to perform well based on economic principles are avoided, in favour of others based on their perception through a strict ESG lens.

Composition

As of April 2025, FAIR held 85 constituents with the top 10 holdings collective weight at ~40%. The fund shows a significant large and midcap tilt (91% at April 2025), with minimal ‘giant cap’ exposure, exhibiting a smaller average market cap relative to the index.

The strategy’s underlying index differs from the category index ASX 200, with its overweight allocations to healthcare, real estate and technology, whilst underweight in financial services and basic materials. Notably, 15 of the top 25 companies of the ASX 200 Index are excluded, including the big 4 banks and large mining players.

Figure 4: Holdings and sector composition of ASX: FAIR. Data as of 30 April 2025.

Interestingly, the ETF has 0 exposure to energy stocks with its largest holdings in Suncorp, Telstra, Brambles and Xero.

Cost and performance

The fee of 0.49%, including the recoverable expense of 0.10%, is lower than active peers but on the higher side compared to competing passive products in the Aussie equity segment.

Index ETFs will see minor deviations from their benchmark returns, largely due to their annual fees—this is referred to as a tracking difference. However, performance lags beyond minor deviations can be attributed to tracking errors, measured by the standard deviation of these differences over time.

Tracking error is another important factor in determining the total cost of an ETF. Notably, FAIR recorded the highest tracking error amongst analyst-rated, large-cap, passive peers versus the Morningstar Category benchmark, at September 2024.

FAIR’s capacity for performance is reduced by the strategy’s limited opportunity set compared with broader mandates. The strategy has also underperformed the index on a 5-year basis.

Trailing year to date performance has been reasonable (5.1% vs 4.95% index performance), driven primarily by underperformance in the materials and energy sectors where the portfolio is underweight. Outperformance of the category benchmark can also be attributed to overweighting healthcare names such as Resmed and Pro Medicus.

Figure 5: Growth of $10,000 investment since inception. Data as of 3 June 2025.

Importantly, the chart below illustrates how FAIR has also underperformed relative to its ESG-focused peers, Vanguard Ethically Conscious International Shares Index ETF VESG, iShares Core MSCI World Ex Aus ESG ETF IWLD and BetaShares Global Sustainability Leaders ETF ETHI.

Figure 6: Growth of $10,000 investment in VESG, IWLD, ETHI and FAIR ETFs over last five years. Data as of 3 June 2025.

Based on our assessment of the fund’s People, Process, and Parent Pillars in the context of fees, we do not believe this fund will be able to deliver positive alpha relative to the category benchmark index, therefore is ascribed a Neutral Morningstar Medalist Rating.

By screening out some of the largest names in the category benchmark, investors accept significant tracking error (and sacrifice potential returns) to service an altruistic, rather than economic objective.

Sustainability

FAIR has an understandable appeal to sustainability-focused investors. This fund has a Morningstar Sustainability Rating* of 5 globes, indicating that the ESG risk of holdings in its portfolio is rather low relative to those of its peers.

One key area of strength for FAIR is its low Morningstar Portfolio Carbon Risk Score** of 5.59 and very low fossil fuel exposure over the past 12 months, which earns it the Morningstar Low Carbon Designation***.

Valuation

Applying our equity research share level valuations to the underlying holdings shows that FAIR screens 1.26 price/fair value (May 2025), indicating the ETF trades above fair value. Notably, it has not traded close to fair value since December 2023.

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ESG terms mentioned in this article

* Morningstar assigns Sustainability Ratings by combining a portfolio’s Corporate Sustainability Rating and Sovereign Sustainability Rating proportional to the relative weight of the (long only) corporate and sovereign positions, rounded to the nearest whole number. Sovereign Historical Sustainability Scores and Corporate Historical Sustainability Scores are ranked and rated separately, to represent the ESG risk of the portfolio relative to its peers for its respective corporate and sovereign positions and then combined by their relative weights for the Portfolio Sustainability Rating.

** The Morningstar Portfolio Carbon Risk Score is the asset-weighted carbon-risk score of the equity or corporate-bond holdings in a fund. The carbon risk of a company is Morningstar Sustainalytics’ evaluation of the degree to which a firm’s activities and products are aligned with the transition to a low-carbon economy. We use Sustainalytics’ company carbon-risk ratings, which indicate the risk that companies face from the transition to a low-carbon economy. At least 67% of the portfolio assets must have a carbon-risk rating from Sustainalytics in order for a score to be calculated. The percentage of assets covered is rescaled to 100%.

*** A Low Carbon Designation helps investors identify low-carbon funds within the global universe. It’s based on two metrics—the Morningstar Portfolio Carbon Risk Score and the Morningstar Portfolio Fossil Fuel Involvement. To receive the designation, a fund must have a 12-month average Portfolio Carbon Risk Score below 10 and a 12-month average Fossil Fuel Involvement of less than 7% of assets. If a designation does not appear on the report, it means the company has not received a Low Carbon Designation.