ICAN: Socially-Responsible Returns

07/06/2017 2:54 am EST

Focus: ETFs

Ron Rowland

Editor, All Star Fund Trader

Environmental concerns have historically been the domain of politics. But as time goes on, and with publicly traded companies facing increasing regulation, more companies appear to be considering environmental, social, and governance (“ESG”) factors in their own operations, says Jason Teed, contributing editor to Ron Rowland's Invest with an Edge.

The reason for this is fairly simple: the more we know about ESG risks, the more it becomes evident that taking them into account produces higher returns and lower risks for companies.

In fact, hundreds of business leaders have pledged this month to voluntarily adhere to the Paris climate agreement.

Why would they do this? Many studies, including one published by the Harvard Business Review, shows that socially responsible companies show higher profitability and stock performance than their counterparts.

Taking a long-term, sustainable view ensures that a company can operate in perpetuity. Going beyond this, however, companies can provide products that provide solutions to ESG challenges.

One example is Tesla (TSLA), which offers electric vehicles. This is more direct than simply improving operational efficiency.

Going forward, it would appear that the appetite for these types of products will only increase. The SerenityShares Impact ETF (ICAN), launched April 13th, 2007, focuses its investments on these products, providing access to companies that are actively making improvements to the environment and society while outperforming the market.

While ESG investing has become more popular over the last 20 years, in the millennial generation, it’s almost a requirement.

According to Bloomberg, about 84% of millennials are interested in socially responsible investing, and that figure is not expected to change as the generation ages, suggesting that demand for sustainable products will only increase.

In more traditional finance, Deutsche-Bank (DB) performed an analysis of more than 2,000 empirical studies dating back to the 1970s and found that about 90% of the studies suggested that ESG investing provides superior returns to passive investing.

This suggests that not only is ESG going to be more in-vogue in the future, but, over the long term, it should provide returns greater than funds that are not focused on ESG investing.

For this reason, current investors and the largest financial advisors are also moving in this direction, creating another tailwind for ESG companies and investments.

Unlike many other ESG indexes, which are subjective in nature, the SSI Impact Index is passive in nature. First, the index uses six pillars (for example, resource scarcity, societal, environmental, healthy living) and 20 sub-themes (for example, energy efficiency, forestry, and green transportation) to select companies.

The index begins with all funds listed on the New York and NASDAQ stock exchanges. It then performs a screening process to determine if the considered companies produce a product that solves or provides improvement to one of the identified challenges.

Companies must be relevant to the considered challenges and also provide benefits or solutions to those challenges. This is a far more direct approach than many other ESG indexes and funds take.

Not only does the company have to be improving its operations with regard to ESG areas, but it also must be providing a product that is beneficial.

The top 10 holdings of ICAN include a large number of tech firms, such as Google (GOOGL) (the largest holding at 4.01%), Apple (AAPL), and Netflix (NFLX).

However, other types of companies are also present, such as Honeywell (HON), CVS Health (CVS), and Disney (DIS), which are leaders in their respective sectors. The reasons these companies, and certain sectors, are included are varied (for example, Disney is included for its promotion of cultural diversity).

Sector exposures are heaviest in Industrials, Technology, and Health Care, while Energy is somewhat underweight versus its market-capitalization weight. ICAN has an expense ratio of 0.50%, and dividends will be paid annually.

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