Environmental, social and governance investing is popular with investors, but many ESG exchange-traded funds don’t have long track records, which may leave some financial advisors hesitant to recommend them to investors.
One of the earliest ESG ETFs, the Workplace Equality Portfolio (EQLT) from ALPS Advisors, celebrated its fifth birthday this week. EQLT is an equal-weight, passively managed large-cap index fund that selects firms which support lesbian, gay, bisexual and transgender employees.
It’s a great concept that’s in tune with the times, but it hasn’t set the world on fire since it launched in late-February 2014. For starters, the fund has just $23.8 million in assets, which isn’t great for a five-year-old fund. And its five-year average annual return of 9.2 percent trails the 10.6 percent return on the SPDR S&P 500 ETF Trust (SPY). It also has trailed SPY on a three- and one-year basis, though it’s off to a better start in 2019 with a year-to-date return of 12.9 percent versus 11.5 percent for SPY.
EQLT was the only ETF specifically focused on the LGBT community until the InsightShares LGBT Employment Equality ETF (PRID) debuted in January 2018. This fund has only $2.6 million in assets, but perhaps it will ultimately benefit from being one of the “Hidden Gems” spotlighted during a session at last month’s Inside ETFs conference in Florida.
PRID has outperformed EQLT on a one-year basis (2.17 percent versus 0.56 percent), but is 185 basis points behind EQLT so far in 2019.
As you might expect, both funds share an overarching mission to focus on workplaces that have non-discrimination polices regarding sexual orientation and gender-identity, among other equality practices. EQLT follows the Workplace Equality Index and has 271 holdings. PRID uses the UBS LGBT Employment Equality Index and holds 297 companies. To create its index, InsightShares uses the LGBT civil-rights advocacy group Human Rights Campaign Foundation's Corporate Equality Index to gauge how companies treat LGBT employees.
PRID’s holdings are 100 percent domestic, while EQLT has 91 percent U.S. holdings, with 4 percent in the U.K. and a smattering in Canada, Japan and Europe. A Morningstar style box puts both funds in the large-cap core category. PRID tilts a bit more toward growth since its top three sectors are technology (28 percent), healthcare (15 percent) and consumer cyclicals (15 percent). EQLT is a bit more value-oriented, with the financial sector its biggest holding at 22.4 percent, followed by consumer cyclicals (21 percent) and technology (15 percent).
Rich Cea, head of InsightShares by UBS, says having a narrowly focused ETF like PRID can attract investors who want to hone in on certain parts of the broader ESG investment philosophy.
“One of the key things that makes LGBT equality so important from a corporate standpoint is that there are limited state and federal protections for the LGBT community,” Cea says, noting the Human Rights Campaign index rates companies on how equally they treat employees.
There’s both a social aspect and an economic aspect, which is why focusing on workplace equality works as a thematic ETF, he says, adding that companies that invest in the best talent and have access to the deepest talent pool are going to be the most innovative.