ETFs Holding Guns, Opioids & Prisons

"Impact investing" often gets conflated with "environmental, social and governance" (ESG) investing, but though the two share much crossover, their goals are still subtly different.

Whereas ESG investing is about investing in companies whose business practices rank favorably along three particular factors (eco-friendliness, social causes and good corporate governance), impact investing is about taking into account in your decision-making process the impact companies have on their communities and on the world at large.

To impact investors, sociopolitical controversies such as immigrant detention, mass shootings and the opioid crisis can be portfolio game changers. Hundreds of ETFs hold stocks related to these three recent flashpoint issues—and not always the ones you might expect.

Immigrant Detention-Related Stocks

Although most of the companies involved in the business of detaining and deporting undocumented immigrants to the U.S. are privately owned, a few are publicly traded.

Perhaps the two most visible ones are private prison operators Geo Group (GEO) and CoreCivic (CXW), formerly Corrections Corp. of America. Together, these two companies have more than $300 million worth of contracts with the U.S. Immigration and Customs Enforcement to operate immigrant detention facilities across the country.

Other publicly traded companies provide logistical or administrative assistance. General Dynamics (GD), for example, has contracted with the Office of Refugee Resettlement to help monitor and track children as they move through the government's shelter system and into foster care.

According to FactSet data, 263 ETFs hold shares of at least one of these three companies. Below are the 10 ETFs with the highest aggregate weight:

Defense, But Also Real Estate & IT

One might assume that defense or national security-themed ETFs would dominate this list. However, the ETF with the top aggregate weight is in fact the Invesco KBW Premium Yield Equity REIT ETF (KBWY), which tracks small- and midcap equity REITs weighted by dividend yield.

Other nondefense-related ETFs with notable weightings include the Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF (SRVR), which tracks real estate stocks related to data and infrastructure; the EventShares U.S. Policy Alpha ETF (PLCY), which tracks companies poised to benefit from government policy changes; and the Global X Superdividend ETF (SDIV), which holds global high-yield stocks. SRVR has 4.6% in detention-related companies, PLCY has 3.8% and SDIV has 2.1%. 

Assetwise, many of these ETFs are small funds: PLCY only has $13.5 million in assets under management, while SRVR only has $2.6 million. That means the market value of their positions is minimal. PLCY's position in CoreCivic and General Dynamics translates to just $520,000 worth of stock, while SRVR's position in Geo Group and CoreCivic translates to just $120,000.

Broad Stock ETFs Hold Billions

The ETFs holding the largest dollar amount of detention-related stocks are listed below:

Most of these are large, popular broad-market or sector funds; in fact, the list includes some of the largest (by assets) ETFs on the market. The $268 billion SPDR S&P 500 ETF Trust (SPY) alone holds $611 million in General Dynamics stock, while the $152 billion iShares Core S&P 500 ETF (IVV) holds $355 million.

Together, these 10 ETFs own $2.84 billion worth of stock in Geo Group, CoreCivic and General Dynamics. That's more than the current market cap of CoreCivic, which is $2.5 billion.

Which ETFs Hold Gun Stocks?

Most companies involved in the manufacture and retail of civilian firearms are either privately owned, or their gun-related activity represents a fraction of their revenues. The three publicly traded companies generating the most revenues from guns are:

• Sturm, Ruger & Co (RGR), 95% of revenues
• American Outdoor Brands Corp. (AOBC), 68%
• Vista Outdoor, Inc. (VSTO), 49%

Eighty-two ETFs hold at least one of these three gun stocks in their portfolios. That's almost double the number of funds we found holding gun stocks the last time we checked (read: "ETFs Pressured To Drop Gun Stocks").

The vast majority of ETFs holding gun stocks are either small-cap funds that hold weapons manufacturers because of their small size; or single-factor funds, such as value or dividend funds, that include weapons makers due to their strong balance sheets. The ETFs with the largest percentage holding is the Pacer U.S. Small Cap Cash Cows 100 ETF (CALF), which holds just 2.62%.

Small-Cap ETFs Dominate

Again, percentages alone can be misleading when trying to understand just how much money is changing hands. Below are the 10 ETFs with the highest amount of assets in gun stocks:

Almost all the ETFs with the most money in gun stocks are billion-dollar small-cap and broad-market funds, such as the iShares Core S&P Small Cap ETF (IJR), which holds $105 million in Vista Outdoors and Sturm Ruger. The one thematic fund that makes it onto this list is the iShares U.S. Aerospace & Defense ETF (ITA), which also holds $389 million in detention-related stocks.

ETFs Holding Opioid Stocks

Dozens of public companies are involved in the manufacture and distribution of opioids, though state lawsuits have most often targeted eight specific companies as the instigators of the opioid crisis. These include:

• Purdue Pharmaceuticals, which is a private company
• Teva Pharmaceutical Industries (for which no ownership data was available, likely because it trades as an ADR)
• Allergan (AGN)
• Endo International (ENDP)
• Johnson & Johnson (JNJ)
• AmerisourceBergen Corp (ABC)
• Cardinal Health (CAH)
• McKesson Corp (MCK)

There are 319 ETFs with at least one of these six public opioid manufacturer and distributor companies in their portfolio. Below are the 10 with the highest percentage weighting to opioid stocks:

Unsurprisingly, all of these ETFs with the highest weighting in opioid stocks are pharmaceutical and health care sector ETFs. The ETF with the highest aggregate weight was the iShares U.S. Pharmaceuticals ETF (IHE), with 16.5%.

In terms of dollar value held, however, broad-market equity funds and single-factor funds once again held the highest amount of money in controversial stocks: 

Tables sources: ETF.com, FactSet. Data as of June 20, 2018

SPY holds $5.1 billion worth of opioid-related stocks, while IVV holds $2.9 billion; that's in addition to the $611 million and $374 million these funds hold, respectively, in detention-related stocks.

Always Look Under The Hood

The main takeaway is this: Though the relevant sector and thematic ETFs often hold the largest percentage of certain controversial stocks in their portfolios, in terms of sheer dollars held, broad-based equity ETFs hold more by far.

Broad-based, nonsector or nonthematic funds are also the most likely types of ETFs to contain these controversial stocks in their portfolios. Broad-based large-cap equity ETFs represent 35% of all ETFs holding detention stocks and 41% of ETFs holding opioid makers. Broad-based small-cap ETFs represent 55% of funds holding gun makers.  

So if a fund's position in controversial stocks matters to you, then it behooves you to look under the hood of every ETF you own, every time. You must understand not just weightings by percentage, but how much money that percentage translates to.

What may seem like a large weight by percentage in a controversial stock may translate to just a few hundred thousand dollars; and what may appear to be a miniscule weight by percentage can translate to billions of dollars' worth of stock. In short: Impact investing is not for the lazy. 

Contact Lara Crigger at [email protected]