More investors, particularly those in the millennial and Gen Z demographics, are looking to invest in accordance with personal values. The recent proliferation of environmental, social, and governance (ESG) funds has made that objective easier.
However, there’s growing demand for products that go behind environmental emphasis. Market participants are clamoring for more socially driven concepts, including those focusing on diversity, equity and inclusion (DEI). Some exchange traded funds, including the Calvert US Large-Cap Diversity, Equity and Inclusion Index ETF (NYSE Arca: CDEI), are answering that bell.
CDEI follows the Calvert US Large-Cap Diversity Research Index, and that benchmark’s methodology is meaningful. Simply, member firms score well in terms of workforce diversity, inclusive workplaces, and notable strides towards improving diversity.
CDEI Relevance Rising
For investors looking to align values with strong long-term potential, CDEI is a potentially compelling vehicle for multiple reasons. Investors don’t consider many firms highly diverse in the current asset management landscape.
“Research shows that diverse-owned asset managers are responsible for less than 1.5% of assets under professional management in the US,” noted Morgan Stanley’s Emily Thomas. “Why are so few assets managed by diverse firms? One possibility is that some investors—individuals, families and institutions, as well as the advisors that serve them—harbor implicit bias when selecting asset managers.”
As Thomas observed, long-term data indicate performance delivered by diverse asset managers doesn’t differ greatly from that of their counterparts. How that plays over long holding periods with funds such as CDEI remains to be seen. CDEI may be a long-term winner, particularly when tech stocks are in style, because the ETF has a 41.18% weight to that sector. That’s well in excess of what’s found in standard broad market indexes.
There is another point of allure for investors evaluating CDEI. Research suggests that publicly traded companies that score well in terms of diversity often outpace rivals.
“As sustainability investors seek to reward companies with a more diverse workforce, research increasingly shows that this can lead to materially positive financial outcomes,” added Morgan Stanley’s Thomas. “For example, companies in the top quartile for ethnic and cultural diversity on executive teams were, according to a leading consulting firm, 33% more likely to outperform the national industry financial benchmark.”
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