ETF Watch: Nuveen Launching Socially Responsible Funds

Firm rolling out family of ESG ETFs covering slices of U.S. market, while Amplify debuts active covered-call ETF.

Today Nuveen is rolling out five ETFs under its NuShares brand, all of which will rely on environmental, social and governance criteria for their construction. The funds track indexes co-developed by Nuveen and MSCI.

The funds are listed on the Bats exchange. Bats Global Markets is the owner of ETF.com.

The list of new ETFs includes the following, along with their expense ratios:

• NuShares ESG Large-Cap Growth ETF (NULG), 0.35%                        
• NuShares ESG Large-Cap Value ETF (NULV), 0.35%                             
• NuShares ESG Mid-Cap Growth ETF (NUMG), 0.40%                         
• NuShares ESG Mid-Cap Value ETF (NUMV), 0.40%                             
• NuShares ESG Small-Cap ETF (NUSC), 0.40%

Nuveen is a subsidiary of TIAA CREF, and ESG strategies have long been a part of that firm’s DNA, according to Nuveen Managing Director and Head of ETFs Martin Kremenstein.

“This is something that is really core to the very heart of what TIAA is all about,” he said, noting that this would not be the last ESG ETF launched by Nuveen.

The funds’ underlying indexes are based on derivations of the MSCI USA Index and use MSCI ESG Research data to assign scores to companies. Companies heavily involved in typically forbidden business lines by most ESG standards such as alcohol, tobacco, weapons, nuclear power and gambling are excluded from the index, while the remainder are evaluated in relation to their industry peers according to various ESG criteria that are often based on issues like climate change, public safety and business ethics, according to the prospectus.

The eligible firms are then ranked by their ESG scores within their industry group, with the highest-scoring selected for inclusion in the index. Sector weights are adjusted to reflect those of the parent index, the prospectus said.  

Products For The Portfolio Core
Kremenstein noted that the launch of the five funds makes sense because most investors are still using style and size in their domestic allocations.

“The one driving force behind this is an attempt to make ESG more investable. A lot of ESG products that are out there are thematic and focus on a single sector, whether it’s water or clean energy—they’re very tactical. Or they are one-off funds, and the question is, how does that fit in a portfolio? Where does it leave me underweight? Where does it leave me overweight?” he added.

“These [ETFs] are designed for investors who want to adopt a consistent framework across size and style within the U.S. that they can apply to their U.S. domestic equities ­­­­­­allocation,” Kremenstein said, pointing out that risk profiles of the products are intended to be similar to those of the parent indexes so that investors can use them in the core of their portfolios without worrying about unintended concentrations or underweights.

Amplify Adds Active Covered Call Fund
Amplify Investments launched its third ETF today. The Amplify YieldShares CWP Dividend & Option Income ETF (DIVO) is an actively managed fund that targets dividend-paying stocks and writes covered calls on its holdings when appropriate.

DIVO is listed on the Bats exchange and comes with an expense ratio of 0.95%.

The fund is subadvised by Capital Wealth Planning, which has run essentially the same strategy as a separately managed account for years, the Enhanced Dividend Income Portfolio, the prospectus noted.

Amplify CEO Christian Magoon notes that there is some $350 million invested in the strategy in SMA format and that the track record will be included in the prospectus.

One ETF, Two Income Streams
The strategy’s portfolio consists of two subsets—an equity portfolio of 20-25 high-quality large-cap U.S. stocks selected for the likelihood that they will continue to grow their dividends, and a tactical covered-call options portfolio. The equity portfolio is designed to roughly reflect the sector breakdown of the S&P 500, the prospectus says.

The covered-call portfolio, unlike many covered-call strategies in ETF wrappers, is opportunistic and does not automatically write call options on a predetermined or automated schedule. Instead it uses a security’s strength and implied volatility as signals to write the options. DIVO is expected to generate income in the vicinity of 2-3% from dividends and 2-4% from option premiums, the prospectus says.

“For some traditional dividend investors, it could double their income,” Magoon said. He points out that the current covered-call products tend not to be actively managed and thus lack DIVO’s opportunistic element in addition to often writing covered calls on indexes rather than individual stocks.

“We saw an opportunity in the existing ETF product set to provide something that was differentiated,” he added.

It looks like DIVO’s main competitor will be the PowerShares S&P 500 BuyWrite Portfolio (PBP), which is index-based. PBP writes covered calls against the S&P 500. It has some $290 million in assets under management and rolled out in 2007.

Covered-call strategies tend to outperform when the market is exhibiting low volatility and underperform when the market is going up. However, the covered calls provide some protection when the market turns abruptly downward, in addition to the income from covered-call premiums.

7 ETFs Transferring To Bats

Recent announcements from Cambria Investment Management and ProShares said that the two firms would be delisting at combined total of seven funds from the NYSE Arca and relisting them on the Bats Exchange.

All of those transfers will take place on or about Dec. 29. Both press releases stated that current shareholders of the affected funds would not need to take any action, and that trading in the ETFs would be as usual.

Cambria is moving four of its funds over:

• Cambria Sovereign High Yield Bond ETF (SOVB)
• Cambria Value & Momentum ETF (VAMO)
• Cambria Foreign Shareholder Yield ETF (FYLD)
• Cambria Global Asset Allocation ETF (GAA)

ProShares is moving over three of its funds, all from its “Dividend Growers” family of ETFs. With these moves, the entire Dividend Growers family will be listed on one exchange. The three funds that are transferring to Bats include the following:

• ProShares S&P 500 Dividend Aristocrats (NOBL)
• ProShares MSCI EAFE Dividend Growers (EFAD)
• ProShares MSCI Europe Dividend Growers (EUDV)

Contact Heather Bell at [email protected].