Nuveen, the investment management business of TIAA, debuted its first exchange-traded fund in September 2016 and its most recent ETF last month. The company now has 12 ETFs with total assets of slightly more than $706 million. Nine of its funds invest with a mandate to follow environmental, social and governance (ESG) principles. Interestingly, its first and most-recent products—the Nuveen Enhanced Yield U.S. Aggregate Bond ETF (NUAG) and Nuveen ESG Large-Cap ETF (NULC), respectively, aren’t ESG-focused funds. But for the most part, Nuveen sees ESG investing as its calling card with ETFs, and Financial Advisor recently spoke with Jordan Farris, Nuveen’s head of ETF product development, about Nuveen’s approach to ETF investing.
FA: What did Nuveen seek to achieve when it entered the ETF space?
Farris:
We do a responsible investing survey every year, and we did our fourth one in 2018. We saw that people are becoming more aware of what responsible investing is and are demanding that those types of standards be incorporated into the products they want to invest in. All of that helped drive our product direction.
FA: How do you measure success for your ETFs?
Farris: We look at success in a variety of ways. One of them is asset growth. We saw a pick up in asset growth after our domestic ETFs hit their two-year anniversary in December, and we think that will increase even more when they hit their three-year anniversary. But we want to look at the performance track record and whether they are doing what they’re supposed to be doing. Are they incorporating the ESG criteria and delivering the risk-and-return profile that investors would experience in non-ESG products? We see success in the asset pickup—all of our products are above $50 million [with the exception of its newest product, NULC, which has assets of nearly $7 million, as well as the Nuveen Enhanced Yield 1-5 Year U.S. Aggregate Bond ETF (NUSA), at $27.3 million]. We’ve had asset growth across the entire suite.
And we’re also seeing success with advisors using these products to construct entire portfolios versus just incorporating ESG into one sliver of their portfolio or their book.
FA: The ESG funds all use indexes with TIAA in their name. What role does TIAA have in developing the underlying indexes?
Farris: Our asset management business, including the responsible investing team, was still under the brand name TIAA when the indices were created, so we chose to put the TIAA name on the indices. We use MSCI’s ESG and carbon data as the underlying methodology to determine which securities will go into the products. My team provided the expertise for ETF product development and the distribution strategy. The subadvisor is Teacher’s Advisors, which is part of TIAA.
FA: Since these are new-ish products, has it been a struggle to get them on investment platforms?
Farris: We do have a little bit of an advantage being a larger firm with established relationships and we knew the right people to go to when we launched the products. But the requirements to be onboarded onto a platform are consistent with any firm no matter their size. We’re still going to have to meet the same thresholds pertaining to volume and AUM. Thankfully, we’ve had enough growth within our suite that we’ve been able to get fairly good platform access to the wirehouses and regional and independent broker-dealers and the RIA channel.
That has been a major distribution focus for us because without that access to those home-office platforms it makes our wholesalers' jobs more difficult when they’re interacting with individual advisors.
FA: How are advisors using the Nuveen ESG ETFs in terms of fitting them into portfolios?
Farris: We’re seeing them being incorporated into holistic philosophies. Based on our survey, we know that investors are increasingly interested in incorporating responsible investing and ESG principles into their portfolios. In turn, advisors want to develop solutions they can offer to their clients who show that interest. As opposed to 20 to 30 years ago when the main approach to ESG was exclusionary investing, now we’re using a best-in-class, or ESG leaders approach where we’re ranking companies across sectors by their ESG score, and taking the companies that are doing the best in managing their ES and G risks. That enables advisors to incorporate ESG criteria across an entire portfolio.
FA: How has this product suite performed since it launched?
Farris: Since they’ve launched, more than half of our products have outperformed their non-ESG benchmarks from which they were developed. What we’re trying to do is provide the risk/return characteristics of a non-ESG product but incorporate the ESG and low-carbon criteria we consistently use throughout our methodology.
Research finds that incorporating ESG criteria into the investment selection process may add incremental return to a strategy. As we’ve seen with half of our products, there has been some outperformance. These products have been around for more than two years, so we’ll see if that trend continues.
FA: What criteria should investors use to evaluate the performance of Nuveen’s ESG funds? Should it be against non-ESG funds or the ESG universe?
Farris: There are two ways to do that, and I leave it to the advisor to choose which one they prefer. Built into our index methodology are predictive tracking error bands around the index from which our indexes are developed. For example, our developed markets product, NUDM [Nuveen ESG International Developed Markets Equity ETF], is built using the MSCI EAFA Index and should have a predictive tracking error within a certain range of the MSCI EAFA Index. That’s the best way to compare the performance of that ETF against a non-ESG benchmark, which in this case is the MSCI EAFA.
The other way to do it is comparing it to the other ETF benchmarked to the MSCI EAFA, which is EFA, an iShares product [iShares MSCI EAFE ETF]. And you can do something similar to that across the other products we have on the market.
FA: What’s next for Nuveen in the ETF space?
Farris: We will continue along the same path we’ve been following. We have one high-yield ESG product that has been filed. We want to continue bringing products that incorporate ESG and low-carbon criteria into the index methodology, but also seek to track the risk/reward characteristics of a non-ESG benchmark. And we want to do it within the major Morningstar categories that don’t have ESG-branded products.