As more corporations prioritize environmental, social, and governance (ESG) principles, many are doing well in terms of climate-aware and net-zero agendas. While that’s welcomed in the investment community, many market participants, including professional asset allocators, are demanding that companies up their social and governance games. That includes enhanced focus on gender diversity.
Those efforts could encourage investors to evaluate gender-focused exchange traded funds, including one of the category’s pioneers — the SPDR MSCI USA Gender Diversity ETF (SHE). Like many granular forms of ESG, gender investing isn’t without its critics. However, those naysayers can be easily refuted by a crucial factor: returns.
“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.
Long story short, companies with strong gender diversity on their boards of directors and their senior management ranks performed well against the MSCI All-Country World Index (ACWI) over long holding periods. The proof is in the pudding.
“The results suggest that the market does not fully price the information contained in either set of diversity metrics. This is because a positive return premium can be generated by owning more diverse firms and avoiding (or in this case, shorting) low-diversity firms. Relative to investing in low-diversity firms during the sample period, investing in high-diversity firms can be shown to generate an annual return premium of 2.5% for the case of board and 4% annual return premium for the case of senior management,” added Guido.
For its part, SHE follows the MSCI USA Gender Diversity Select Index, which is intended to be a broad gauge of domestic companies that score well in terms of gender-diverse hiring practices across all levels of the firm.
The ETF does an admirable job of presenting investors with comparable sector exposures to the S&P 500, as SHE allocates about 53% of its weight to the technology, healthcare, and financial services sectors. Those groups combine for just over 53% of the S&P 500.
SHE’s strategy could be increasingly relevant because it’s not focused entirely on board gender diversity, which, as Guido points out, is now expected in the market.
“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,” he 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.