Clients Asking For Gun-Free ETFs

March 07, 2018

In the two weeks since a former student killed 17 people with an AR-15 rifle at Marjory Stoneman Douglas High School in Parkland, Florida, investors are increasingly exploring environmental, social and governance (ESG) ETFs as a potential solution to divest portfolios of weapons manufacturers.

Since the shooting on Feb. 14, $147 million in assets have flowed into these kinds of ETFs, $64 million of which went toward funds that explicitly screen out some or all gun stocks, including Sturm, Ruger & Co.; American Outdoor Brands Corp.; and Vista Outdoor, Inc. (read: "ETFs Pressured To Drop Gun Stocks").

At first glance, these inflows appear minimal, especially compared with the roughly $18 billion in assets ETFs as a whole took in during the same period. As a result, many media outlets have reported that investors simply aren't interested in gun-free investments.

The reality, however, is more nuanced. Advisors say that investors want to go gun-free; they just don't know how.  

Advisors See ‘Surge Of Inquiries’

"The surge of inquiries we've had in the past five days is unlike anything I've ever seen before. We’ve been inundated," said Jennifer Sireklove, director of Responsible Investing at Seattle-based Parametric Portfolio Associates. The firm manages more than $230 billion in assets for endowments, high net worth individuals and teachers' pensions.

ETF.com spoke to eight registered investment advisors of various sizes, locations and philosophies; together they manage more than $500 billion in assets. Of these advisors, six had had clients contact them over the past two weeks with concerns about the presence of gun stocks in their portfolios.

"[The interest has come from] some people I wouldn't expect," said Sara Stanich, president and CEO of the $40 million Stanich Group in Brooklyn, New York, including "older clients who've never mentioned this kind of thing before."

Three of the advisors, including Stanich and Sireklove, had either transitioned, or had plans in place to transition, client assets away from gun stocks. Others were still researching or exploring their options.

Not From The Same Cloth

Investors wishing to divest from weapons manufacturers have a wealth of ESG ETF options. But it's important to note that not all ESG ETFs define exclusionary screens in the same way—or even use them at all.

Only 25 of 65 socially responsible ETFs, or 38%, explicitly screen out some or all gun stocks from their investment universe. They are listed in Table 1.

For another 28 ETFs, the question of whether or not to own gun stocks is irrelevant, as they are thematic funds focused on, say, solar power companies or green bonds. Six more ETFs are unclear in their documentation about whether they use exclusionary screens. 

 

Table 1: ESG ETFs That Screen Out Some Or All Gun Stocks
Ticker Fund Expense
Ratio
AUM ($M)
DSI iShares MSCI KLD 400 Social ETF 0.50% $982.40
SUSA iShares MSCI USA ESG Select ETF 0.50% $662.98
ESGE iShares MSCI EM ESG Optimized ETF 0.25% $262.26
ESGD iShares MSCI EAFE ESG Optimized ETF 0.20% $177.40
CATH Global X S&P 500 Catholic Values 0.29% $137.88
MXDU Nationwide Maximum Diversification U.S. Core Equity ETF 0.34% $111.55
ESGG FlexShares STOXX Global ESG Impact Index Fund 0.42% $57.47
ESGU iShares MSCI USA ESG Optimized ETF 0.15% $53.08
NUEM NuShares ESG Emerging Markets Equity ETF 0.45% $42.74
NUSC NuShares ESG Small-Cap ETF 0.40% $42.51
NUBD NuShares ESG U.S. Aggregate Bond ETF 0.20% $41.23
NULG NuShares ESG Large-Cap Growth ETF 0.35% $40.55
NUDM NuShares ESG International Developed Markets Equity ETF 0.40% $40.33
NUMG NuShares ESG Mid-Cap Growth ETF 0.40% $40.07
NUMV NuShares ESG Mid-Cap Value ETF 0.40% $37.93
NULV NuShares ESG Large-Cap Value ETF 0.35% $34.34
ETHO Etho Climate Leadership U.S. ETF 0.47% $27.60
SUSB iShares ESG 1-5 Year USD Corporate Bond ETF 0.12% $24.59
ESG FlexShares STOXX U.S. ESG Impact Index Fund 0.32% $19.10
SUSC iShares ESG USD Corporate Bond ETF 0.18% $9.78
GUDB Sage ESG Intermediate Credit ETF 0.35% $9.75
LRGE ClearBridge Large Cap Growth ESG ETF 0.59% $4.50
YLDE ClearBridge Dividend Strategy ESG ETF 0.59% $4.09
ICAN SerenityShares IMPACT ETF 0.50% $4.08
CHGX Change Finance Diversified Impact U.S. Large Cap Fossil Fuel Free ETF 0.75% $3.79

Source: ETF.com, FactSet. Data as of March 2, 2018

 

Some ESG funds screen out only "controversial" or "unconventional" weapons, a descriptor that varies from issuer to issuer, but that usually refers to bioweapons, land mines and other munitions banned by the Geneva Conventions and other international accords. One such example is the $66 million FlexShares STOXX Global ESG Impact Index Fund (ESGG).

Other funds drill down deeper, splitting the universe of stocks into military weaponry and civilian firearms. For example, the largest ESG ETF, the $985 million iShares MSCI KLD 400 Social ETF (DSI), screens out both military weapons and civilian firearms makers.

Still other ETFs take a "zero tolerance" policy. One example is the $3.8 million Change Finance Diversified Impact U.S. Large Cap Fossil Fuel Free ETF (CHGX), which aggressively screens gun stocks, culling not only weapons manufacturers and retailers, but also firms that supply components to manufacturers, and military software and services contractors.

 

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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