Sustainable and virtuous investing is evolving and means more choices, some relevant and sophisticated, for clients.
Gone are the days when investing for sustainability and virtue solely meant embracing an environmental, social and governance (ESG) fund where the primary sales pitch is avoid alcohol, civilian firearms, gambling and tobacco stocks.
When it comes to virtuous investing, that methodology is yesterday's news and it's riddled with controversy and debate. Whether it's sustainability, climate awareness or other values-based investments, clients want more than just prosaic ESG methodologies.
Some issuers of exchange traded funds are answering the call. For example, ARK Investment Management launched the ARK Transparency ETF (CBOE:CTRU) this week and that product fits the bill as a credible alternative to standard ESG fare.
CTRU has some superficial traits that could put eyeballs on it. First, it's just the second new ETF launched by ARK this year and it's one just nine in the issuer's overall suite. Second, CTRU is an index-based fund – one of just three in the ARK stable – making it a departure from the issuer active management style.
CTRU tracks the Transparency Index, which is a basket of the 100 most transparent companies based on the index provider's scoring methodology. All of the components trade on US exchanges and they've got an average market capitalization of $127 billion so advisors can be assured they're not putting a fund full of financially flimsy companies in front of clients.
CTRU's benchmark shares some commonalities with old guard ESG products. For example, it excludes (i) alcohol, (ii) banking, (iii) chemicals, (iv) confectionary, (v) fossil fuel transportation, (vi) gambling, (vii) metals, (viii) minerals, (ix) natural gas, (x) oil, and (xi) tobacco stocks.
Add to that, index members have 95% fewer environmental violations, 94%less toxic air emissions and 99% fewer instances of financial fraud.
Good news for clients: If CTRU lives up to the index's precedent, it could be stout performer as the compound annual growth rate (CAGR) over the past five years for index components is a stellar 35%. That's an indications returns won't be left on the table in the name of virtuous investing.
“ARK believes that transparency enhances the performance of companies while benefiting the well-being of people. Transparency implies openness, communication, accountability and trust,” according CTRU's issuer.
By excluding energy stocks, significantly under-weighting consumer staples and financial services and trimming healthcare, CTRU feels like an older competitor.
However, the new ETF goes further, significantly overweighting technology and consumer discretionary stocks relative to broader market benchmarks and standard ESG funds. Those sectors combine for 69% of the fund's weight.
That implies some level of concentration risk, at least at the sector level, but that's tempered by CTRU's index equally weighting its holdings. Familiar holdings included Nvidia (NASDAQ:NVDA) and Tesla (NASDAQ:TSLA).
Bottom line: CTRU is a new approach to an investment style clients are increasingly interested and it has the backing of an issuer clients are likely familiar with. ARK and its index provider deserve credit for going beyond the norm in this category and excluding bank stocks – a novel approach to be sure. Time will tell if clients want access to this ETF. Chances are they will.