‘Social Alpha’: Nonprofits Dive Into ETFs

January 04, 2018

Under The Hood Of WOMN, NACP

Impact Shares' initial filing is for three ETFs, including the Impact Shares YWCA Women's Empowerment ETF (WOMN) and the Impact Shares NAACP Minority Empowerment ETF (NACP). A third ETF, the Impact Shares Cause Based ETF, was also filed, but the fund has yet to establish an index or partner charity.

According to Powell, Impact Shares and the partner charity together construct a list of stocks that meet their social impact criteria, while a third-party provider optimizes the portfolio to the broader market.

The result is meant to be a collaboration between investing and philanthropic experts. The security selection screens aren't meant to stay static. WOMN tracks U.S. large-cap companies with policies that are "empowering to women," as determined through 19 criteria, including the gender balance of their leadership teams and workforce; their policies promoting equal pay and work/life balance; their policies promoting equitable access to company resources and opportunities; and their commitment to transparency and accountability.

NACP, meanwhile, tracks U.S. large-caps that are "empowering to minorities," though the index is a "work in progress," said Powell. Some of the criteria include the ratio of minorities in company leadership and workforce; equal pay policies; and opportunities for minority recruitment and advancement.

Both ETFs also overlay an additional screen excluding weapons manufacturers, gambling companies and tobacco companies, as well as any company on the Council on Ethics for the Norwegian Government Pension Fund Global, an often-used benchmark of ethical companies. Furthermore, any company that has engaged in discriminatory or unethical practices is ineligible for inclusion in WOMN for two years.

Both ETFs would carry an expense ratio of 0.75%.

Financial Beta, Social Alpha

Rather than trying to outperform, Impact Shares ETFs will attempt to generate financial beta using only companies that align with each charity's particular mission. Powell calls the result "social alpha."

"It's like factor investing, but being exposed to a single social factor, versus a single financial factor," he said.

The concept could be especially attractive for charities looking to engage a new, younger donor base. "Through ETFs, nonprofits can have lifelong engagement [with investors] without asking for charitable gifts on day one," Powell added.

Social alpha may also appeal to stability-seeking institutions, even other nonprofits, says Powell.

For McWhorter, though, the goal of WOMN is to get more women of all ages investing, period.

"Typically, women don't invest in the stock market because they're more risk averse [than men]," she said. "But an ETF is less risky than owning one or two stocks. So we can actually use our ETFs to attract women investors, who haven't invested at the same rates as men."

‘Drinking Our Own Kool-Aid’

Though nonprofit investing is not a new phenomenon, the use of ETFs among nonprofits remains anecdotally low. It's difficult, however, to quantify precisely which nonprofits use ETFs and how, because many are too small to be required to file 13-F documents that detail investments within a portfolio.

Still, says McWhorter, the YWCA Metropolitan Chicago is no stranger to ETFs. Fully one-third of its investment portfolio is invested in three ETFs: a Russell 3000 ETF, a global infrastructure fund and a 1-3 year credit bond ETF (brands and tickers were withheld). With their new ETF, WOMN, "we'll be drinking our own Kool-Aid," said McWhorter.

Contact Lara Crigger at [email protected]

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