Clients Asking For Gun-Free ETFs

March 07, 2018

Biblical ETFs Open To Gun Ownership

Yet not all ESG ETFs eliminate weapons manufacturers from their portfolios. In fact, many "biblical values" ETFs intentionally do not apply exclusionary screens for gun stocks, including Inspire, an ETF issuer with four funds worth a combined $130 million.

"We believe that firearms play an important role in public safety, equipping our police and military forces to combat crime and terrorists, and that investments in responsible, ethical firearm-related companies can be an honorable investment," president and CEO Robert Netzly said in an email statement.

Even the largest biblical values ETF, the $142 million Global X S&P 500 Catholic Values ETF (CATH), which applies an exclusionary screen for "unconventional" weapons, still has explicit leeway to invest in "conventional" weapons makers, so long as 50% or less of their revenues come from gun sales.

Too Small To Own

That said, most biblical values ETFs still don't have positions in civilian firearms producers like Sturm, Ruger; American Outdoor Brands; or Vista Outdoor—not because of moral objections but because their investment focus is large-cap stocks. All three companies are too small to be included in a large-cap index.

Interestingly, the S&P 500 Index, which imposes no weapons screens, is gun-free for the same reason, as are most other large-cap index funds.

The one biblical values ETF that does cover the small/midcap space, the $29 million Inspire Small/Mid Cap Impact ETF (ISMD), holds both Vista Outdoor and American Outdoor Brands.

The other two ESG ETFs that cover the small/mid cap space, the $45 million NuShares ESG Small-Cap ETF (NUSC) and the $40 million NuShares ESG Mid-Cap Growth ETF (NUMG), do screen out firearms makers, as well as the makers of land mines and bioweapons.

Problems With Immediate Divestment

Some advisors argue that there are good reasons to remain invested in ETFs that contain gun stocks, however, at least for the time being.

"Reallocating a portfolio will have a transition cost," said Noah Schwartz, founder of the $10 million Blueprint Financial Strategies, based in Newton, Connecticut.

These transaction costs may include trading commissions for ESG funds, few of which are available yet on commission-free ETF platforms; or wide bid/ask spreads, as a result from trading smaller, less liquid securities.

Furthermore, added Schwartz, "selling a total stock market index ETF or small/midcap ETF to fund an ESG alternative may create significant tax consequences, as markets have performed so well over the past five to 10 years."

Furthermore, investors—particularly larger institutional investors—may want to remain invested so that they can exert shareholder pressure to force changes within the company.

"Divestment has an immediate satisfaction, but if investors want a seat at the table, then they lose that by divestment," said Parametric’s Sireklove.

ETF investors seeking additional gun-free options may not have long to wait. In a notice posted Friday, BlackRock said it planned to explore "index-based portfolios that exclude just firearms manufacturers and retailers."

Contact Lara Crigger at [email protected]

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