Schwab Unveils Its 1st ESG ETF

Today, financial services provider Charles Schwab launched its second ETF of 2021; before this year, the issuer had taken an 18-month break from adding new funds to its lineup.

The Schwab Ariel ESG ETF (SAEF) is the issuer’s first ESG ETF, and it relies on the NYSE’s model for nontransparent actively managed ETFs.

SAEF comes with an expense ratio of 0.59% and lists on the NYSE Arca.

New Partnership
Not only is SAEF Schwab’s first ESG ETF and its first actively managed ETF, the firm has partnered on an ETF for the first time with another investment firm. Subadvisor Ariel Investments is the first African American-owned investment firm in the U.S. and has been in existence for nearly 40 years, with more than $17 billion in assets under management.

Ariel Investments brings its proprietary ESG investment process to SAEF. The fund’s subadvisor has incorporated ESG criteria into its investment approach since its founding.

According to its prospectus, SAEF will invest primarily in companies that fall within the capitalization range of the Russell 2500 Index, which excludes the 500 largest companies that are included in the Russell 3000 Index. This plays to Ariel’s strength as a small- and midcap value manager.

According to Malik Sievers, head of ESG strategy at Schwab Asset Management, Ariel Investments was an ideal partner for Schwab given the firm’s long history in the ESG space and its small- and midcap value focus in a market where large-cap and growth strategies dominate.

“Ariel really does have a distinct data advantage. If you think about that small- and midcap space, it typically doesn't have the same coverage that [the large-cap space] would have,” he said, noting that a lot of ratings companies don’t even cover some of the companies that Ariel covers, and pointing out the firm’s active engagement with the companies in its universe. Sievers adds that Ariel’s proprietary ratings are based on roughly 160 data points that draw on its own as well as third-party research.

“We clearly see clients increasingly want to incorporate their values and beliefs into their investment decisions, and we think we are pretty well-positioned to deliver solutions to them at scale,” he said.

“It's wonderful to come together in a product [with Schwab] that we think really brings together the strengths of both of our organizations and brings a product to market that we think is a different approach and a thoughtful approach to ESG—and in a way that we think should have traction out there in the marketplace,” said Ariel Portfolio Manager Ken Kuhrt.

Active ESG Methodology

The fund seeks capital appreciation by targeting companies with a wide-moat advantage, low valuations and consistent fundamentals, as well as strong management and financials.

The investment process also incorporates evaluations of ESG risk for each company, scoring them based on standard ESG concerns and excluding those companies deriving the majority of their revenues from tobacco, fossil fuels, private prisons or weapons of any kind, the prospectus says.  

Interestingly, the prospectus also notes that Schwab can take over management of a portion of the fund’s assets based on market conditions, and that if it does so, it may or may not use Ariel’s ESG methodology.  

The NYSE model for nontransparent actively managed ETFs that underlies SAEF relies on a daily proxy portfolio that includes the actual holdings at altered weights, with additional securities added to obscure the actual holdings. The model requires the actual holdings and their weights to be disclosed on a quarterly basis.

Contact Heather Bell at [email protected]