Columbia Threadneedle has 14 ETFs on the market today commanding more than $1 billion in total assets. Among them are three ETFs that launched last year, and merge environmental, social and governance (ESG) investing with a dividend focus. It’s equity income meets socially responsible investing, if you will. The funds are:
- Columbia Sustainable U.S. Equity Income ETF (ESGS), 0.35% expense ratio, $5.8 million in assets
- Columbia Sustainable International Equity Income ETF (ESGN), 0.45% expense ratio, $5.6 million in assets
- Columbia Sustainable Global Equity Income ETF (ESGW), 0.40% expense ratio, $5.7 million in assets
Ed Kerschner, Columbia’s chief portfolio strategist, walks us through the process behind blending these two investing themes in search of one single outcome: finding sustainable income.
ETF.com: Your ETFs merge two popular trends in ETF investing: dividends and ESG. Is that how investors should interpret these portfolios?
Ed Kerschner: That's a good way to look at it. We approach it as an answer to the question, “What's the need out there among investors?” We’ve been talking about something I'm calling the “new rate regime.” For the first time in four decades, interest rates stopped going down, by definition, once you hit zero. I'm not saying they have to go up a lot, but essentially you've had a tail wind for four decades, and now you don't.
So we began our process with a search for dividend income. Stocks that grow their dividends historically outperform the market, and stocks that don't grow their dividends underperform the market.
And for stocks that cut their dividends, you need to anticipate that the damage is done the year before they cut it, not after. If you wait until they cut, it's too late. So, we've developed screens that look at different cash flow and dividend coverage numbers to hopefully avoid the dividend cutters.
We’ve found that, on average, if a stock cuts its dividend, it is down more than 20% in the year before it cuts its dividend, and it underperforms the S&P 500 by about 32.5 percentage points the year before the dividend is cut.
ETF.com: And the ESG component to this process?
Kerschner: ESG is probably very misunderstood. In fact, I just got a new paper from Ernst & Young, and one of the data points is that 74% of respondents think the reason you do ESG activities is to build your corporate reputation with customers.
There's still this nagging perception that an ESG investor wants to do good. The reality is that the majority of investors still believe they have to give something up to be an ESG investor. And that’s not true at all.
You get into this issue called “materiality.” If you screen companies for factors that are in environmental, social and governance that are material specifically to their industry, you find that these companies outperform.