The National - The rise of ETFs targeting social movements

We live in an age of activism, where social movements such as Black Lives Matter and #MeToo dominate the headlines, and campaigners raise their voices against climate change, animal rights, human rights and a host of other causes.

The noise has grown so great that even the investment industry has been forced to respond, with asset managers rushing out funds aimed at investors who want to match their money with their beliefs.

In 2020, half of all new exchange-traded fund (ETF) launches in Europe, the Middle East and Africa pledged to invest according to environmental, social and governance (ESG) goals, attracting billions.

Yet, the ESG label can cover a multiple of "sins", as every fund applies different ethical standards.

Some ethically minded investors might be happy to invest in an oil giant like Shell, but draw the line at tobacco maker Philip Morris, for example.

The weapons trade was routinely seen as non-ESG but following Russia’s invasion of Ukraine, many now view it as a necessary evil.

Now, a handful of managers are trying to stretch the principle by aiming funds at consumers with closely defined beliefs.

In September 2019, Beyond Investing, a company made up of vegan finance professionals, launched the US Vegan Climate ETF.

The fund, which has the ticker VEGN, aims to invest in a “cruelty-free and fossil-free way” by shunning businesses that exploit or torture animals, or damage the planet.

The fund doesn’t invest in vegan cafes or meat-free manufacturers, as you might expect. Instead, its top holdings include names that will be familiar to many investors, including Google-owner Alphabet, credit card issuers Visa and Mastercard, electric car maker Tesla and chip maker Nvidia.

Yet, Beyond Investing holds companies to account, recently offloading Apple after calling out its decision to sell leather bands for the Apple Watch. It remains a relative minnow with assets under management of about $66 million, a fraction of the $7 trillion total net assets held in ETFs.

Others have followed in its wake, though. In December 2021, it was joined by the VegTech Plant-based Innovation & Climate ETF (ticker: EATV), which soon after launched the VegTech Plant-based Innovation and Alternative Proteins Index (EATVI).

The VegTech Index focuses on “companies building a more efficient, cruelty-free and eco-friendly food supply chain through disruptive technologies and innovation”.

It’s now possible to invest in racial justice via the Impact Shares Minority Empowerment ETF (NACP), which “provides exposure to US companies with strong racial and ethnic diversity policies in place, empowering employees irrespective of their race or nationality”.

The #MeToo movement also has its fund, the SPDR MSCI USA Gender Diversity ETF (SHE), which tracks a market cap-weighted index of US companies promoting gender diversity and employing a relatively high proportion of women at all levels.

For every action, there’s a reaction, and a handful of ETF fund launches have charged in the opposite direction, by actively investing in so-called “sin stocks”.

There has also been a splurge of anti-ESG ETFs, including the Strive US Energy ETF, whose top holdings include Exxon Mobil, Chevron and Conoco Phillips.

Another ETF is, like former President Donald Trump, determined to make America great again, and has the ticker to prove it.

The Point Bridge America First ETF (MAGA) allows investors to direct their money into companies that align with Republican political beliefs.

The American Conservative Values Fund (ACVF) does much the same while, the God Bless America ETF (YALL) screens out companies espousing liberal politics.

Most of these funds are listed in the US and are not available to investors elsewhere, but that’s not the only reason to tread carefully.

These funds have a novelty value but that’s about it, says Jason Hollands, managing director of fund platform Bestinvest.

“I can’t see the logic of adopting an investment approach that specifically targets only investing in ‘sin’ sectors ... rather than funds that invest widely," he says.

Tickers like VICE, BAD, MAGA and YALL may be amusing but there is nothing funny about losing money, warns Russ Mould, investment director at platform AJ Bell.

“If you want to buy thematic ETFs, only do so after first building a diversified portfolio that covers the main bases of the stock market.”

Thematic ETFs will generally only hold a small subset of stocks “often highly correlated with each other because they are in the same industry", Mr Mould says.

"Performance can, therefore, be volatile and divergent from the market at large. Rather like an active fund but without a manager at the helm, and often with less diversification."

They are likely to have higher annual investment charges than standard funds, because of the specialist nature and the greater cost involved in stock selection.

Whatever morals they may espouse, these ETF managers are still trying to sell you something, Mr Mould adds.

“Believing something or wanting it to be true is powerful, but it matters not a jot to share prices.”

For those who are keen, Vijay Valecha, chief investment officer at Century Financial, casts his eye over three ETFs that are making a pitch for people’s principles.

US Vegan Climate ETF

This $66 million fund has annual charges of 0.6 per cent a year and has generated “sturdy” returns of 11.91 per cent a year over the past three years. Year to date, it has climbed 6.54 per cent and the 12-month dividend yield is 0.78 per cent.

“This ETF offers similar growth rates to that of the S&P 500. Its top holdings include S&P 500 companies like Nvidia, Visa and Mastercard and may benefit as the vegan market is expected to grow by 20 per cent a year until 2026, so there’s an opportunity for those happy to take on the risk,” he says.

VegTech Plant-Based Innovation & Climate ETF (EATV)

This actively managed $5 million ETF has an expense ratio of 0.75 per cent a year and is up 5.49 per cent in 2023. It yields 1.89 per cent.

“While two thirds of its holdings are in the US, EATV also has geographical exposure to countries including Ireland, Norway, Israel, Japan and Hong Kong.”

iShares MSCI USA Islamic UCITS ETF (ISDU)

This Sharia-compliant $158 million ETF was incorporated in Ireland and aims to track the performance of the MSCI USA Islamic Index.

“Its expense ratio is just 0.3 per cent as it is passively managed. Over the last three years, ISDU has generated solid returns of 14.74 per cent a year, and is up 7.46 per cent so far this year. It yields 1.42 per cent and top holdings include big US names Microsoft, Exxon Mobil, Tesla and Chevron.”