Stance Debuts With Active ESG ETF

Yesterday, Stance Capital rolled out an actively managed ESG ETF that it had run as a separately managed account since 2014. The Stance Equity ESG Large Cap Core ETF (STNC) selects its holdings from the large-cap U.S. equity space as represented by the Russell 1000 and S&P 500 indexes.

STNC comes with an expense ratio of 0.85% and lists on the NYSE Arca.

“We purpose-built Stance Capital around the idea that if you build portfolios a certain way, you can not only align your values but get strong risk-adjusted performance,” said Bill Davis, one of Stance Capital’s founders and portfolio managers.

He observes that at the time his company was developing the strategy nearly a decade ago, values-aligned investing was more about eliminating things and negative screening.

“Ultimately, it’s hard to generate good performance if that’s the approach,” Davis added.

Inner Workings
For a portfolio that holds roughly 30 positions, the methodology behind STNC is somewhat complex. Securities are evaluated from an ESG perspective that excludes those participating in the coal, tobacco and weapons industries, and scores companies based on 21 sustainability-related key performance indicators.

From there, a machine-learning model is used to identify companies most likely to outperform in the coming quarter, and then an optimization process is used to reduce tail risk and maximize diversification, the prospectus says. The fund rebalances quarterly.

Davis describes the process as “quantitative, systematic and largely unemotional.”

The SMA that the ETF is based on launched in 2014 and has roughly $80 million invested in it. Davis notes that the SMA has outperformed the S&P 500 by 200 basis points, gross annualized, and has received a five-star rating from Morningstar since the company began rating it.

Top holdings on the day of STNC’s launch included Intuit (2.57%), Amazon.com (2.51%) and MSCI (2.37%).

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

Shielded Alpha Model

STNC relies on Blue Tractor’s model for semitransparent active ETFs that the firm markets as “Shielded Alpha.” While lack of transparency is generally regarded as undesirable by ESG investors, Blue Tractor’s model is uniquely suited to ESG approaches because it actually reveals all of the fund’s holdings daily, just with different weights. Other nontransparent models tend to replace some of their holdings with statistically similar securities to preserve the “secret sauce” of the active manager.

The Blue Tractor model publishes a daily basket of portfolio holdings (called its "Dynamic Stock Specific Risk Portfolio," or Dynamic SSR Portfolio) that includes 100% of the security names in the actual portfolio, in at least 90% of their actual weightings.

The remaining 0-10% is decided via an algorithm that randomly generates weightings, while simultaneously reducing tracking error between the Dynamic SSR Portfolio and the actual fund holdings.

For example, if the fund holds a 2% weight in IBM, then one day it might appear in the Dynamic SSR Portfolio as 1.98%, then 2.01% the next, then 1.99% the next. (Guardrails are implemented to ensure the adjusted security weightings don't deviate too far from their actuals.)

Although often lumped in with proxy portfolio solutions, Blue Tractor's Dynamic SSR Portfolio doesn't use substitute stocks. All that's changed are individual security weights.

Also, unlike the proxy portfolio models, the exact details of the overlap between the actual portfolio and the publicly published basket are never disclosed. The aggregate size of the algorithmically generated portion of the portfolio changes day to day and is also never disclosed.

However, just like mutual funds, the actual fund holdings will be published quarterly.

One additional feature: Blue Tractor gives portfolio managers the ability to directly tweak their alternate portfolios via a cloud-based platform.

Contact Heather Bell at [email protected]