Ethical Investing or Alpha Sacrifice: The U.S. Green ETF Performance Tradeoff

Abstract

This study examines the risk-adjusted performance of ten actively managed Green ETFs in the U.S. market over 13 years, using models such as the CAPM, Fama-French 3-factor, and 5-factor to measure abnormal returns. Results show a trend of underperformance, with eight out of ten funds displaying significantly negative alpha coefficients, indicating they did not generate excess returns compared to market benchmarks. This underperformance is linked to the sector's dependence on volatile government subsidies, lower inherent profitability, and the impact of negative screening methods. Notably, performance varies: funds focused on large-cap U.S. infrastructure and established sectors such as global energy and wind power tend to be more resilient, while those in small- and mid-cap technology, particularly solar energy, experience pronounced underperformance and volatility. The study also finds that the performance of Green ETFs is influenced by macroeconomic and policy environments, with negative returns during the Euro area crisis and positive returns during the COVID stimulus period, followed by a return to negative excess returns in the post-COVID phase. In conclusion, the returns of Green ETFs are heavily affected by market dynamics and policy decisions. These funds are characterized as high-risk, growth investments, suitable for investors who prioritize ethical values and sustainability over alpha generation. The study highlights the importance of policymakers establishing stable regulatory frameworks to mitigate the sector's vulnerability associated with short-term subsidies.