Building A Socially Responsible Smart Beta ETF

March 28, 2017

Adding Smart-Beta Factors To Mix

What sets these funds apart from other socially responsible ETFs is the inclusion of smart-beta factors. These factors, as developed by Eugene Fama and Kenneth French, are the key drivers of equity risks and returns.

Advisors can take advantage of these factors to tilt a portfolio according to the risk tolerance of their clients or to outperform a market portfolio.

Index providers achieve exposure to these factors by either screening stocks or modifying the weight of the securities in an ETF portfolio based on a particular fundamental factor. The table below lists the different factors used by these ETFs:

Smart-Beta Factor (by AUM)

Ticker Fund Smart-Beta Factor
ESGL Oppenheimer ESG Revenue ETF Sales
ESGF Oppenheimer Global ESG Revenue ETF Sales
ISMD Inspire Small/Mid Cap Impact ETF Size: Small Cap tilts
NUSC NuShares ESG Small-Cap ETF Size: Small Cap tilts
ESGN Columbia Sustainable International Equity Income ETF Dividend
NULG NuShares ESG Large-Cap Growth ETF Growth
NUMG NuShares ESG Mid-Cap Growth ETF Growth
NULV NuShares ESG Large-Cap Value ETF Value
NUMV NuShares ESG Mid-Cap Value ETF Value
ESGS Columbia Sustainable U.S. Equity Income ETF Dividend
ESGW Columbia Sustainable Global Equity Income ETF Dividend

 

NuShares funds obtained factor exposure by using a predefined investment universe of stocks geared toward a factor.

Oppenheimer funds instead use a proprietary revenue weighting to outperform its benchmark.

Columbia funds use a proprietary factor ESG alongside dividend yield to seek income opportunities. An equal-weighting scheme is also used in ISMD to tilt the ETF portfolio to small-cap stocks to benefit from the company size factor.

New ETF Marketplace Niche

By adopting smart-beta traits into ESG products, ETF issuers are betting on a growing demand for socially responsible products.

Still, these ETFs are young, and have only just begun to gather assets, and fund closure risks are latent. Nonetheless, this is an exciting new idea in the ETF marketplace, and if these products prove successful, expect socially responsible investing to enter other areas of the ETF space, such as international ETFs or fixed-income ETFs.

At the time of writing, the author did not own any of the securities mentioned. Luis Guerra can be reach at [email protected].

 

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