Invesco introduced ESG versions of its two main Nasdaq-100-based ETFs, although the differences between the original ETFs and their new counterparts are fairly minimal.
The new funds share the same base index as their older siblings, the Invesco Nasdaq 100 ETF (QQQM) and the Invesco Nasdaq Next Gen 100 ETF (QQQJ), which are up 19.56% and 12.95%, respectively, year-to-date. The Nasdaq-100 follows the 100 largest capitalization nonfinancial companies listed on the Nasdaq stock market, while the Next Gen index follows the next 100 largest companies that are eligible for the prime index but aren’t included yet.
QQQM shares the same index as the popular $196 billion Invesco QQQ Trust (QQQ), but is structured as a ’40 Act fund rather than a unit investment trust.
QQMG and QQJC employ screens to remove companies that derive at least 5% of their revenues from carbon-fuel production, nuclear energy, firearms, pornography and the production of alcohol, tobacco and cannabis.
The funds also use rankings from Sustainalytics that estimate a company’s unmanaged ESG risks, banning any company that ranks 40 or higher on the scale running from zero to 100.
For that ESG twist, Invesco is charging a premium of 5 basis points over QQQM’s and QQQJ’s 0.15% expense ratios.
However, the differences between the two funds are not particularly stark. QQQM and its ESG counterpart QQMG have the same top 10 holdings, consisting of Microsoft, Apple, Nvidia, Netflix, Amazon, Facebook, Adobe, Tesla and two classes of Alphabet stock. The funds have different weightings per each company, but those stocks represent 53% of QQQM and 54% of QQMJ.
Nick Kalivas, Invesco’s head of factor and core product strategy, said while the constituents of the newly launched ETFs are similar to their existing counterparts, the weights assigned to each stock is altered based on further ESG ratings.
He argues that change in weighting strategy makes the ETFs an attractive choice for customers who are looking for a product that already aligned with some ESG principles due to the nature of its constituent companies.
“A lot of the Nasdaq-100 at its starting point is pretty ESG friendly,” he said. “Then you're making these kinds of improvements to that through a fine-tuning ESG-based methodology.”
Just six firms were eliminated from the Nasdaq-100 based on QQMJ’s criteria: three electric utilities, Honeywell, Analog Devices Inc. and Peloton. The latter was excluded because Sustainalytics has yet to issue a report on the company.
The next-gen ETFs are more diverse from each other, as Roku and Trade Desk Inc. are in QQQJ’s top 10 holdings and are replaced by Tractor Supply Co. and Trimble in QQJG. QQQJ’s top 10 holdings account for just over 21% of the fund’s weight, while QQJG’s top 10 accounts for nearly a quarter.
The ESG filters removed 10 stocks from QQJG’s holdings in all: Four are casinos or betting platforms, three are pharmaceutical firms and the remainder are Beyond Meat, Vimeo and Alliant Energy. Beyond Meat was disqualified by Sustainalytics for having a business risk score of 47.5, breaching the ceiling of 40 for inclusion in the index.
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