Just weeks after it shocked the business world by winning multiple seats on ExxonMobil’s board as a virtually new fund, Engine No. 1 is launching a new ETF to bring activist investing to indexing.
The hedge fund launched the Engine No. 1 Transform 500 ETF (VOTE) on Cboe Global Markets Wednesday, carrying an expense ratio of just 0.05%. The fund will track Morningstar’s U.S. Large Cap Select Index, which follows the largest 500 companies in the U.S. by market capitalization, and has seed funding of $100 million to make its first buys.
The target index and expense ratio puts VOTE right up against some of the biggest ETFs of all that also track large cap U.S. companies. It is 4 basis points cheaper than the SPDR S&P 500 ETF Trust (SPY), while being 2 basis points higher than the iShares Core S&P 500 ETF (IVV) and the Vanguard S&P 500 ETF (VOO).
VOTE’s strategy is to force operational change in its portfolio companies through activist board votes and pressure campaigns, ranging from emissions reductions to improvements to pay equity and workplace diversity.
The fund will be also integrated immediately into investment options produced by Betterment, a retail investing app that heavily promotes ESG-focused portfolios.
In an interview, Engine No. 1's managing director Yasmin Bilger said the ETF wrapper is a prime way for investors who want both the returns of an index following the biggest companies in the world and to make sure their investments go toward social good to achieve their goals.
“One of the other gaps I see in the market right now is that for many investors, particularly in the sustainable ETF space, the change isn't real to them, it's not tangible to them, and I think they struggle with the 'so what' of what their money is really fighting for,” she said. “I think that this more impact-focused approach to engagement is going to be a really important way to engage with our investor base and bring that to life.”
Upending Exxon & Major Companies
The hedge fund sent tremors through corporate boardrooms across America in late May, when it won three seats on the oil giant’s 12-member board despite Exxon’s aggressive efforts to dissuade its shareholders from installing activist directors.
At the time of the vote, Engine No. 1 held just 0.02% of Exxon’s stock. But it won support from state-run retirement funds and other institutional investors with a message that it would drag the company away from its bet on long-term fossil fuel demand and into a low-emissions future that would make it attractive to ESG-minded investors and reduce the company’s role in climate change.
Replicating Activist Success
VOTE intends to take that approach and apply it to some of the largest companies in the world, throwing investment weight behind forcing change at longtime institutions rather than investing in younger companies that have ESG in their foundational core.
In that way, VOTE is a first-of-its-kind fund: While its returns are passive, the fund’s managers intend to boost those returns through active intervention in the companies it is indexing.
Bilger said Engine No. 1 has less aggressive options in its toolkit to spark changes in its portfolio companies, including directly engaging with management and convincing larger shareholders to back board proposals.
The fund will start with two to four thematic goals to push on its target companies every year based on broader environmental and social issues, but Bilger declined to say what those goals will be or what campaigns Engine No. 1 will use.
However, she said the alliance-building the company used to win seats on Exxon’s board is validation of its broader activist strategy.
“It was a good example of how we owned two basis points of that company, and really the success was driven off of the investors we brought along with us and the coalition that we formed,” she said. “That sentiment will absolutely flow through to the ETF and our strategy.”
Bilger says the company plans to build out a long-term ETF business with multiple funds but declined to offer more details on other products in development.