ETF Trends CEO Tom Lydon discussed the ETF of the Week: ARK Transparency ETF (CTRU) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.
The ARK Transparency ETF seeks to provide investment results that closely correspond, before fees and expenses, to the Transparency IndexTM (TRANSPCY), designed to track the stock price movements of the 100 most transparent companies in the world.
Transparent companies can positively impact investments, providing investors with an edge in the marketplace. By opening their books and holding themselves accountable to investors, transparent companies ultimately engage in fewer business controversies and environmental violations that significantly impact portfolio returns.
The approach may also be considered a socially responsible investment methodology. For example, when comparing the social impact between the underlying Transparency Index and the S&P 500, the Transparency Index components exhibits:
- 95% less environmental violations
- 98% less financial crimes violations
- 100% less fossil fuel industry exposure
- 98% less labor relations violations
- 94% less toxic air pollution exposure
- 97% less toxic water pollution
- 99% less data privacy violations
- 100% less weapons industry exposure.
ARK believes that transparency enhances the performance of companies while benefiting the well-being of all. Transparency implies openness, communication, and accountability. ARK believes transparent companies have less friction which could lead to exponential growth opportunities.
The underlying Transparency Index utilizes an exclusionary screening process to remove what the index describes as non-transparent industries. The index excludes the Global Industry Classification Standard (GICS) industries, including alcohol, banking, chemicals, confectionery, fossil fuel transportation, gambling, metals, minerals, natural gas, oil, and tobacco.
Firms receive a higher rating in Transparency Invest’s rankings if they have shorter terms and conditions pages and fewer lawsuits or reveal the total costs of items and services on their websites and score high on corporate reputation rankings. The underlying index includes screens for Six Key Performance Indicators (KPIs), which determine the level of transparency throughout an organization as defined by the Index Provider. The six KPIs include transparency standards, terms, total accountability, transparent cost, truth, and trust.
According to a 2020 article in the Journal of Human Relations, organizational transparency can be measured across the dimensions of timely information disclosure, clarity, and accuracy. Furthermore, research has shown that a “measure of transparency consisting of these three dimensions is capable of explaining variation in important outcomes.” The benefits of organizational transparency include factors for employee satisfaction, brand loyalty, client retention, and the potential for increased revenue growth over time.
The ARK Transparency ETF also follows an equal-weight indexing methodology. A traditional market-cap weighted index tends to be biassed towards large caps, concentration, and momentum.
Meanwhile, an equal-weighted methodology can offer a more balanced portfolio and correct what some investors may consider a common flaw in market-cap weighted indices. Specifically, when rebalancing, an equal-weight index sells what has been bid up to and buys more of what has been left behind. Therefore, an equal-weight index tends to be cheaper than a market-cap weighted index measured by lower price/earnings, sales, book, or cash flow.
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