Sexism's Effect On ETF Returns

November 13, 2017

Let me be upfront: I like the SPDR SSGA Gender Diversity Index ETF (SHE). Investing in female-led companies and boardrooms is compelling, even powerful; especially in this particular moment we inhabit, where every day breaks yet another news story about sexual harassment and gender-based discrimination.

So, yes, I want SHE to succeed. As much as anybody can root for an inanimate construct, by golly, SHE, I'm rooting for you.

Which is why it pains me to say this: SHE has underperformed the broader market, as measured by the SPDR S&P 500 Index ETF Trust (SPY), by 5.2% since it launched in March 2016:



Granted, the discrepancy isn't huge. But neither is it negligible, especially since the grand conceit of ESG (environmental, social, governance) investing is that you don't have to sacrifice returns to follow your conscience.

But before you look at this chart and conclude that women-led firms just don't perform as well as ones led by men, it's worth peeking under the hood of these two funds to see exactly why their returns differ.

Different Portfolio Construction

The reason for the performance divergence is simple … yet not: Despite both tracking the largest public companies in the country, SHE and SPY hold vastly different portfolios.

SPY's index committee selects 500-ish stocks from the large- and midcap space. SHE, meanwhile, selects from the top 1,000 largest companies, evaluating them on the ratio of women on their boards of directors and in executive positions (defined as vice president/managing director or higher). The top 10% of companies in each sector are included in the portfolio, then market-cap weighted—with the caveat that each company that makes it in must have at least one woman on its board or as CEO.

The motivation behind such a selection/weighting process is to ensure that SHE mimics the moves of the broader market, offering neutral large-cap exposure to investors who also want to support companies led by women. But doing things this way has two consequences.

First, SHE pulls from a deeper pool of securities than SPY: The top 1,000 versus all the top 500, respectively. So, not only are there stocks in SPY that, by design, won't show up in SHE, there are a fair number of stocks in SHE that won't show up in SPY.

Second, the stocks that do appear in both SHE and SPY are given very different weightings. Consider the difference in the top 10 holdings between the two ETFs:


Top 10 Holdings, SPY vs. SHE
SPY     SHE  
Apple 3.94%   Pfizer 5.80%
Microsoft 2.70%   Coca-Cola 5.59%
Alphabet (A+C Shares) 2.61%   PepsiCo 4.67%
Facebook 1.92%   Amgen 3.89%
Amazon 1.81%   IBM 3.86%
Johnson & Johnson 1.68%   MasterCard 3.79%
Berkshire Hathaway 1.58%   McDonalds 3.73%
Exxon Mobil 1.57%   Lockheed Martin 2.50%
JP Morgan Chase 1.49%   U.S. Bancorp 2.43%
Procter & Gamble 1.12%   Texas Instruments 2.32%
Total: 20.42%   Total: 38.58%

Source:; data as of 11/6/2017


It's easy to see that these two ETFs don't look anything alike.


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