What is CHGX? (Pros, Cons, and Strategies)

In today's investment landscape, the concern for sustainability and ethical practices is growing. CHGX, or the AXS Change Finance ESG ETF, addresses these concerns by offering a fund that focuses on Environmental, Social, and Governance (ESG) criteria. If sustainable and responsible investing resonates with your values, CHGX might be an excellent addition to your portfolio. This post will delve into what CHGX is, evaluate its pros and cons, and discuss potential investment strategies.

What is CHGX?

CHGX stands for AXS Change Finance ESG ETF, and it's designed for investors interested in responsible and sustainable investing. This ETF seeks to track the performance of the Change Finance Diversified Impact U.S. Large Cap Fossil Fuel Free Index.

Unlike traditional ETFs that may hold stocks across various sectors without considering their environmental or social impact, CHGX is built on the premise that companies should not just create financial value but also contribute positively to society and the planet. This approach implies excluding companies associated with fossil fuels, weapons, and other activities that could harm the environment and society.

Key Features of CHGX

• Investment in U.S. large-cap companies with strong ESG performance
• Exclusion of companies involved in fossil fuels, weapons, tobacco, and other non-ESG compliant sectors
• Aims to provide similar returns to the S&P 500 while upholding ethical criteria

After excluding companies that fail to meet specific ESG criteria, the ETF constructs a diversified portfolio of U.S. large-cap stocks, which is rebalanced semi-annually based on ESG ratings.

CHGX Composition

CHGX includes companies known for their strong ESG practices, such as Microsoft (MSFT), Apple (AAPL), and Alphabet (GOOGL). It targets industries like technology, healthcare, and consumer goods, focusing on companies that score high in environmental sustainability, social responsibility, and good governance.

Pros of CHGX

Ethical Investing

One of the most compelling benefits of CHGX is that it allows investors to make ethical investment choices without compromising on potential returns. If you are concerned about issues like climate change, pollution, human rights, and corporate governance, CHGX aligns with your values by investing only in companies that meet high ESG standards.

Competitive Returns

CHGX aims to track the performance of large-cap U.S. companies while adhering to strict ESG standards, providing returns close to the general market indices like the S&P 500. This allows investors to maintain a competitive edge while investing responsibly.

Low Expense Ratio

Similar to other competitive ETFs, CHGX maintains a low expense ratio. At just 0.49%, it provides an affordable way to invest in a diversified portfolio of ESG-compliant companies. Lower expense ratios are especially beneficial for long-term investments, as they contribute to higher net returns over time.

Diversified Portfolio

CHGX offers a well-diversified portfolio across various sectors, thus minimizing risk. By focusing on large-cap U.S. companies, it provides stability and steady growth, making it a suitable option for both conservative and growth-oriented investors.

Cons of CHGX

Limited Exposure to Certain Sectors

By excluding companies that don't meet ESG criteria, CHGX might avoid entire sectors like fossil fuels or defense. This exclusion could limit exposure to potentially high-performing stocks from these sectors, thereby missing out on certain investment opportunities.

Potential for Lower Returns

While CHGX aims to deliver returns similar to broader market indices, there's always a risk that the ESG criteria may limit the fund's overall performance compared to ETFs that invest more broadly. By focusing on ethical factors, the fund may potentially exclude high-return opportunities from non-ESG compliant companies.

Industry Bias

CHGX may exhibit bias towards industries inherently more aligned with ESG criteria, such as tech and healthcare. This bias can introduce sector concentration risk, which may impact the ETF's performance during periods when these industries underperform.

CHGX Investment Strategies

Investors considering CHGX should focus on the long-term benefits of sustainable and ethical investing. While it may require some adaptation in strategy, the potential for making a positive impact while still achieving financial goals remains strong.

Long-term Investment Strategy

Just like other ESG-focused investments, CHGX is best suited for those with a long-term horizon. By consistently investing over a period of 10 years or more, you can benefit from the growth of large-cap companies while supporting ethical practices. CHGX allows for the alignment of investment with personal values, making it particularly appealing to millennials and Gen Z investors.

Diversification Strategy

To mitigate the potential downsides of limited sector exposure, consider balancing CHGX with other ETFs that cover different sectors or international markets. This approach ensures a broader diversification and reduces the risk associated with focusing exclusively on U.S. large-cap ESG-compliant companies.

Dollar-Cost Averaging

Regular, incremental investments can help maximize returns over time. By adopting a dollar-cost averaging strategy with CHGX, investors can smooth out market volatility and reduce the impact of short-term market fluctuations. This strategy is especially useful in mitigating the risks associated with sectoral biases and ethical investing restrictions.

Dividend Reinvestment

Although CHGX focuses more on ethical investment and capital appreciation, it still provides dividends. Reinvesting these dividends can harness the power of compounding, enhancing long-term growth.

Conclusion

CHGX offers an appealing option for investors who seek to balance their financial goals with a commitment to sustainability and ethical practices. While there are some potential drawbacks, such as limited exposure to non-ESG sectors and the possibility of lower returns, the pros of ethical investing, competitive returns, and a low expense ratio make CHGX a worthwhile consideration.

By adopting appropriate investment strategies, such as long-term investing, diversification, dollar-cost averaging, and dividend reinvestment, investors can make the most of what CHGX has to offer.