Actively-Managed ESG ETFs Offer Diversification for Investors

With an increasing focus on the environment and conservation, markets around the world are adopting environmental, social, and governance (ESG) initiatives. The Invesco MSCI Green Building ETF (GBLD) is one example of a fund that has built on this growing popularity. One unique and developing part of the ESG ETF space however, is in exchange traded funds that don’t disclose holdings on a daily basis, often referred to as semi-transparent ETFs.

“Semitransparent ETFs, which are also called nontransparent ETFs, are actively managed and provide limited and delayed disclosure of the full portfolio, but offer sufficient information to allow the ETFs to trade properly,” reports Ellen Chang for U.S. News & World Report.

The semi-transparent nature of such ETFs assists issuers in shielding fund managers’ investment styles from those managers who might seek to replicate or front-run them based on a more transparent nature of the traditional ETF investment structure.

Actively-managed and semi-transparent ESG ETFs therefore permit portfolio managers to have “more control” over the holdings within the vehicle, meaning it’s less dependent on the index or fund being tracked, explained Jordan Farris, Head of ETF Product Development at Nuveen.

For example, if an ESG ETF is tracking the FTSE 100 index, and is concerned about investing only in the stocks it considers to have beneficial social or environmental impacts, the fund manager of an active ETF is able to quickly divest if a corporation is exposed as having missed its decarbonization target or engaged in a human rights violation.

The increased liquidity of an ETF over a traditional fund means then that investors can hold that corporation almost immediately liable, rather than waiting for quarterly reports or the annual general meeting to make an assessment.

“The first semitransparent ETF using both the New York Stock Exchange Active Proxy Structure and T. Rowe Price’s proxy model went public during the third quarter of 2020. The first 15 semitransparent ETFs raised more than $600 million in assets under management in 2020, demonstrating investor demand,” U.S. News reports, citing Douglas Yones, head of exchange-traded products at the New York Stock Exchange.

Semi-transparent ETFs also provide an avenue for active mutual fund issuers to get into the fast-growing ETF arena. Rather than introducing brand-new products, the issuers adopt a new methodology and apply it to existing funds – many of which are successful in the traditional fund wrapper – making for easier entry to the ETF space.

Financial experts have been also been enthusiastic about the future of non-transparent ETFs, envisioning significant growth potential in the coming years.

“Assets in the active non-transparent category — known as ANTs — could reach $3 billion by the end of next year, Bloomberg Intelligence predicts. The funds have only attracted about $800 million so far, but companies that license the methodology hold a collective $1 trillion in assets, indicating a huge potential for growth,” reports Claire Ballenting for Advisor Perspectives. “Since launching in April (2020) as the coronavirus upended global markets, many of the ANT funds have outperformed peers, showcasing active managers who offer their strategies in an ETF wrapper without revealing all their secrets. They’ve had to overcome investors’ desire for transparency, varied performance records and, of course, a global pandemic.”

This “repurposing” of ETFs could be promising in the ESG space, where investors are become increasingly focused on conservation and environmental concerns.

“For many investors, ESG (environmental, social, and governance) considerations are important factors when it comes to evaluating potential investments,” said the Invesco website. “By selecting ETFs with strategies that align with their own values, investors can gain exposure to dynamic sectors of the 21st century economy while also investing in a brighter tomorrow.”

In a Keynote Speech at the Society for Corporate Governance National Conference, SEC commissioner Elad Roisman, who frequently claims his comments as personal and not those of the Commission, commented on the need of choice for investors:

I think it is beneficial for retail investors to have a wide array of choice and for such funds to compete with one another. But, I do think that retail investors who want ‘green’ or ‘sustainable’ products deserve more clarity and information about the choices they have.” 

Investors looking for semi-transparent ESG ETFs have several choices to consider.

The American Century Sustainable Equity ETF (ESGA) is listed on NYSE Arca and comes with an expense ratio of 0.39%.

The US Carbon Transition Readiness ETF (LCTU) is also actively managed and will invest in Russell 1000 companies well-positioned for the energy transition.

Finally, the Stance Equity ESG Large Cap Core ETF (STNC) “is an actively managed exchange-traded fund (“ETF”) that will invest, under normal circumstances at least 80% of the value of its net assets (plus the amount of any borrowings for investment purposes) in exchange-traded equity securities of U.S. large capitalization issuers that meet environmental, social, and governance (“ESG”) standards, as determined and in the sole discretion of Stance Capital, LLC. The Fund currently considers companies within the Russell 1000® Index and S&P 500® Index to be large capitalization issuers,” according to the Stance website.

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