Market sentiment, SFDR, and their impact on ETFs performance

Purpose Following the European Union’s initiative to enhance market transparency, the purpose of this study is to examine Sustainable Finance Disclosure Regulation (SFDR) Articles 6, 8 and 9 to investigate whether different levels of ethical commitment could influence the resilience of exchange-traded funds (ETFs) during periods of widespread market pessimism. Design/methodology/approach The authors use panel regression models with interaction terms on a sample of 2,119 publicly listed ETFs classified under the European SFDR. In addition, the authors use a propensity score matching approach, alternative variable specifications and conduct subsample analyses to verify the robustness of the results. Findings The findings reveal that sustainable funds, particularly those classified under the SFDR Article 9, are more valued during times of increased pessimism, supporting a potential “flight-to-quality” effect. These funds benefit from greater investor trust and sustain their performance when market uncertainty increases. Originality/value The study documents that sustainable ETFs tend to outperform conventional ones in challenging markets, as investors value ethical commitments and long-term stability more positively during economic downturns. The research contributes to the literature on the intersection between sustainable finance and investor behaviour by demonstrating that ethically oriented investments can serve as a safe haven during periods of increased pessimism, responding to the growing demand from investors who seek both purpose and performance.