During the past few months, a new suite of ETFs has emerged combining two popular themes: socially responsible investing and smart-beta factors.
These ETFs aim to achieve their dual mandate by selecting stocks based on a principle-based methodology, then applying further screens to match the ETF portfolio to a factor or multifactor investment style.
ETF issuers and index providers expect advisors to use these funds to implement strategic and tactical portfolio decisions while keeping their clients’ social concerns in mind. While these products have complex rules and methodologies, a quick overview on how these ETFs are built can help us understand this new and innovative niche in the ETF market.
Size & Style Definition
As of March 2017, there are 11 socially responsible smart-beta ETFs in U.S. markets. Their rigorous selection process starts by delimiting the investment universe of eligible securities. This crucial step sets up the initial constraints and characteristics of the ETF.
For example, as seen in the table below, the Oppenheimer ESG Revenue ETF (ESGL) selects its stocks exclusively from the S&P 500 Index, meaning that ESGL will only target large-cap U.S stocks. By limiting the universe of securities, the index provider can focus its attention on the particular market size and style it wants to apply to its ESG screens and factor methodology.
Underlying Indices & Investment Universe (by AUM)
|Ticker||Fund||Underlying Index||Investment Universe|
|ESGL||Oppenheimer ESG Revenue ETF||OFI Revenue Weighted ESG Index||S&P500 Index|
|ESGF||Oppenheimer Global ESG Revenue ETF||OFI Revenue Weighted Global ESG Index||MSCI All Country World Index|
|ISMD||Inspire Small/Mid Cap Impact ETF||Inspire Small/Mid Cap Impact Equal Weight Index||S&P Midcap 400 Index and Russell 2000 Index|
|NUSC||NuShares ESG Small-Cap ETF||TIAA ESG USA Small-Cap Index||MSCI USA Small Cap Index|
|ESGN||Columbia Sustainable International Equity Income ETF||Beta Advantage Sustainable International Equity Income 100 Index||MSCI World ex USA Index|
|NULG||NuShares ESG Large-Cap Growth ETF||TIAA ESG USA Large-Cap Growth Index||MSCI USA Growth Index|
|NUMG||NuShares ESG Mid-Cap Growth ETF||TIAA ESG USA Mid-Cap Growth Index||MSCI USA Mid-Cap Growth Index|
|NULV||NuShares ESG Large-Cap Value ETF||TIAA ESG USA Large-Cap Value Index||MSCI USA Value Index|
|NUMV||NuShares ESG Mid-Cap Value ETF||TIAA ESG USA Mid-Cap Value Index||MSCI USA Mid-Cap Value Index|
|ESGS||Columbia Sustainable U.S. Equity Income ETF||Beta dvantage Sustainable U.S. Equity Income 100 Index||MSCI USA Index|
|ESGW||Columbia Sustainable Global Equity Income ETF||Beta Advantage Sustainable Global Equity Income 200 Index||MSCI World Index|
Socially Responsible Screens
In the next step of the selection process, the index provider screens the stocks included in the investment universe, and selects those that adhere to its respective principle-based criteria. You can see the ESG method criteria used by these funds in the table below: