Howan exchange-traded fund free of fossil fuels proved oil doesn’t pay

Almost five years ago, the National Resources Defense Council came to State Street Global Advisors with an investment idea.

Those talks resulted in the creation of a green exchange-traded fund, the SPDR S&P 500 Fossil Fuel Free ETF (SPYX), with NRDC among its initial investors. The fund was designed to mimic the performance of America’s S&P 500 Index — minus Big Oil.

Today, the ETF holds 488 of the 505 stocks in the S&P 500. State Street’s timing, it turns out, was just right. Avoiding fossil-fuel stocks has been a boon for investors during the past few years and SPYX has grown into a $650 million fund as it approaches its fifth anniversary in December.

“SPYX gives you the most popular index in the world with a smaller carbon footprint,” said Eric Balchunas, senior ETF analyst at Bloomberg Intelligence. “That’s a tremendous value proposition, and you’ll never wake up in 10 years and see that you’ve underperformed the market because it represents most of the market.” Firms including BlackRock Inc. have similar funds as SPYX, but none has performed quite as well. SPYX has beaten the S&P 500 by 3.6 percentage points since its inception, generating an annual return of 12.9 percent.

The fund’s biggest holdings include a bevy of technology stocks —Apple Inc., Microsoft Corp., Amazon.com Inc., Facebook Inc. and Alphabet Inc. — and a smattering of others, such as Warren Buffett’s Berkshire Hathaway Inc., Johnson & Johnson and Visa Inc., that are the largest companies by market value on the S&P 500.

“If there is a big rally in Big Oil, you will miss that if you own SPYX,” Balchunas said. “That’s really the only risk.” But still, another advantage to SPYX is that the management fee is low, at $20 per $10,000 of investments, he said.

SPYX is categorized as an ESG fund, even though it offers only the “E” — environmental — and not the “S” (social) and the “G” (governance). In the fast-growing foggy world of ESG investing, SPYX is as straightforward a fund as one can find. It won’t buy shares of companies with proven fossil-fuel reserves on their balance sheet. That means the 17 S&P 500 stocks it avoids include Exxon Mobil Corp., Chevron Corp. and Marathon Petroleum Corp.

“The expectation is SPYX will keep growing as the shift to clean energy — wind and solar — is only going to gain momentum, both from a consumer and investor standpoint,” said Matthew Bartolini, head of SPDR Americas Research at Boston-based State Street Global Advisors. SPYX has attracted a net $160 million of new investment so far this year, he said.