On Wednesday, American Century Investments launched two active ESG ETFs utilizing the New York Stock Exchange (NYSE) AMSSM (Actively Managed SolutionSM) to provide additional choices for investors seeking actively-managed Environmental, Social and Governance (ESG) strategies in a lower-cost ETF vehicle. This is the first-time use of the new active ETF structure. Geared to financial professionals, the American Century Sustainable Equity ETF (ESGA) and the American Century Mid Cap Growth Impact ETF (MID), will use the global asset manager’s time-tested stock selection processes with an ESG overlay.
Different From Traditional ETFs
Traditional ETFs tell the public what assets they hold each day. These ETFs will not. This may create additional risks for your investment. For example:
- Investors may have to pay more money to trade the ETFs’ shares. These ETFs will provide less information to traders, who tend to charge more for trades when they have less information.
- The price you pay to buy ETF shares on an exchange may not match the value of the ETF’s portfolio. The same is true when you sell shares. These price differences may be greater for these ETFs compared to other ETFs because it provides less information to traders.
- These additional risks may be even greater in bad or uncertain market conditions.
- MID and ESGA will publish on their website each day a “Proxy Portfolio” designed to help trading in shares of the ETF. While the Proxy Portfolio includes some of the ETF’s holdings, it is not the ETF’s actual portfolio.
The differences between these ETFs and other ETFs may also have advantages. By keeping certain information about the ETFs secret, these ETFs may face less risk that other traders can predict or copy its investment strategy. This may improve the ETFs’ performance. If other traders are able to copy or predict the ETFs’ investment strategy, however, this may hurt the ETFs’ performance.
“We believe these new ESG solutions offer investors the ‘best of both worlds:’ the alpha potential of active management with the advantages of ETFs, including low costs, tax efficiency, and liquidity,” said Ed Rosenberg, head of ETFs for the firm. “This continues the next evolution of the ETF industry, and it expands opportunities for clients by enabling access to managers and strategies that had previously not been available, particularly in an ESG strategy.”
The launch of American Century Sustainable Equity ETF (ESGA) and American Century Mid Cap Growth Impact ETF (MID) comes on the heels of the spring launch of the American Century Focused Large Cap Value ETF (FLV) and American Century Focused Dynamic Growth ETF (FDG), the first two semi-transparent active ETFs in the industry.
The new ETFs enable the firm to dovetail its active management heritage with its unique perspective on ESG and impact investing, according to Jonathan Thomas, American Century Investments’ Chief Executive Officer.
“In many respects, American Century remains a natural destination for investors wanting to have a positive impact on society by including actively managed ESG ETF strategies in their portfolios,” Thomas said. “Our ESG solutions continue to grow, while our ownership model results in more than 40 percent of our annual profits in the form of dividends being directed to funding medical research.”
ESGA invests in large-cap stocks with improving business fundamentals and sustainable corporate behaviors. The portfolio managers take an ESG leaders or “best-in-class” approach to ESG integration by seeking to invest primarily in companies they believe manage ESG risks and opportunities better than their sector peers. The portfolio is permitted to invest in all sectors or industries (excluding tobacco) but intentionally seeks to have a larger weight, relative to the S&P 500, in companies viewed as ESG leaders in their sectors while avoiding or holding an underweight position in companies viewed as ESG laggards. The fund is managed by Gregory Woodhams, CFA, Joseph Reiland, CFA, Justin Brown, CFA, Robert Bove, and Rene Casis.
MID, the first and only active ESG ETF in its category, invests in high-quality mid-cap growth-oriented companies believed to offer attractive investment returns and a positive impact on society. Managers use a top-down and bottom-up stock selection process utilizing proprietary fundamental research to invest in a portfolio of primarily U.S. mid-cap companies exhibiting durable business improvement underpinned by long-term thematic drivers. The portfolio management team creates a macro and bottom-up investment thesis for each holding and using a risk-aware framework, constructs a portfolio that emphasizes stock selection and alignment with UN Sustainable Development Goals (SDGs). The fund is managed by Rob Brookby, Nalin Yogasundram, and Rene Casis.
The ETFs utilizing the NYSE AMSSM will provide daily disclosures of a “proxy portfolio” with different composition and weightings than the fund’s actual holdings. The proxy portfolio reflects the economic exposures and risk characteristics of the ETF’s actual portfolio. The proxy portfolio closely replicates the intraday performance of the actual fund while mitigating the risk of front-running and other activities potentially detrimental to an actively managed ETF and its investors.
The funds will be primarily listed on NYSE Arca, Inc. with Citadel Securities, LLC as the lead market maker and State Street as the custodian.