Among the many themes advisors and investors will be paying attention to next year, continued adoption of environmental, social, and governance (ESG) investing products is sure to be on that list.
Specifically, ESG evolution is likely to be widely monitored, and that includes how effectively companies hone focus on social and governance issues. Those efforts could prompt investors to emphasize concepts such as gender investing — a strategy accessible via a variety of exchange traded funds, including the IQ Engender Equality ETF (EQUL).
While EQUL is just 14 months old, it could be ready for a more prominent role on the ESG ETF stage in 2023 because asset allocators want to see more emphasis on social and governance. Additionally, gender lens investing is backed by a compelling upside profile.
“We constructed a straightforward strategy where, each month within the sample period, we take a long position in high-diversity stocks (top quintile stocks as ranked by diversity) and a short position in low-diversity stocks (bottom quintile stocks as ranked by diversity) and then observe the resulting holding period returns. We do this for both board gender diversity and senior management diversity scores,” noted Dr. Ron Guido for FactSet.
Translation: Companies that prioritize gender diversification on their boards as well as throughout the organization as a whole have established track records of outperforming less gender-diverse ones over long holding periods.
EQUL follows the Solactive Equileap U.S. Gender Equality Index and holds 73 stocks, none of which exceed a weight of 1.7%, indicating that single-stock risk is relatively low in the ETF. That focused roster can also be seen as a sign of selectivity and that there’s ample room for growth in terms of publicly traded companies bolstering their gender diversification credentials.
Moreover, EQUL’s methodology isn’t solely dependent on gender diversification on companies’ boards of directors. That’s a widely expected phenomenon that, as Guido notes, is mostly factored into share prices.
“Although there is an increasing positive return to more diversity in senior management, the returns for the top quintile for boards are relatively flat. We would suggest this is because board composition is so visible and the focus of so much regulation. It often becomes a matter of expectation: good firms have good boards that include women. This market expectation then gets reflected in prices,” Guido concluded.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.