Exchange traded fund investors should consider the investment case for transparent companies when searching for growth opportunities.
In the recent webcast, Invest with Impact: The Importance of Transparency in a Portfolio, Paul A. Pagnato, chairman at Transparency Invest and co-chairman at Cresset, argued that investors should consider an investment approach centered on transparency. For example, the Transparency Index utilizes an exclusionary screening process to remove what the index describes as non-transparent industries. According to a prospectus sheet, 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.
The approach may also be considered a socially responsible investment methodology. For example, when comparing the social impact between the Transparency Index and the S&P 500, Pagnato noted that the Transparency Index components exhibit 95% less environmental violations, 98% less financial crimes violations, 100% less fossil fuel industry exposure, 98% less labor relations violations, 94% toxic air pollution exposure, 97% toxic water pollution, 99% less data privacy violations and 100% less weapons industry exposure.
Ark Invest Management has launched the ARK Transparency ETF (CBOE: CTRU) to help investors follow companies with a high level of transparency around their corporate actions. CTRU has a 0.55% expense ratio.
CTRU tracks about 100 companies based on Transparency Invest’s proprietary scoring methodology. Firms receive a higher rating in Transparency Invest’s rankings if they have shorter terms and conditions pages and fewer lawsuits or reveal the full costs of items and services on their websites and score high on corporate reputation rankings.
Specifically, 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 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.”
Pagnato noted that the benefits of organizational transparency include factors for employee satisfaction, brand loyalty, client retention, and potential for increased revenue growth over time.
“ARK believes that transparency enhances the performance of companies while benefiting the well-being of all. Transparency implies openness, communication, and accountability,” Thomas Hartmann-Boyce, client portfolio manager at ARK Invest, said.
“ARK believes transparent companies have less friction which could lead to exponential growth opportunities,” he added.
The ARK Transparency ETF also follows an equal-weight indexing methodology. Hartmann-Boyce argued that a 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.
Financial advisors who are interested in learning more about the transparent investment strategy can watch the webcast here on demand.