Just in time for Pride Month, a new exchange traded fund aims to connect with LGBTQ investors. Two previous efforts failed to attract enough assets.
The fund, LGBTQ + ESG100 ETF
launched in late May, is a passively managed, large-cap index fund that holds the top 100 U.S. companies that most align with the LGBTQ community.
In 2019, two LGBTQ-focused ETFs were delisted: ALPS Workplace Equality Portfolio ETF and InsightShares LGBT Employment Equality ETFs. Like this new fund, both were mostly U.S. large-cap, passive index ETFs comprising companies that received high or perfect marks for workplace equality in the Human Rights Campaign Corporate Equality Index, a benchmark for corporate LGBTQ policies.
The first ETF stuck around for five years, but the second barely made it two years, even though it was launched with much fanfare by UBS. Neither gained many assets.
Bobby Blair, CEO and founder of LGBTQ Loyalty Holdings, which launched the fund with issuer ProcureAM, says community input on holdings makes this fund different.
LGBTQ Loyalty Holdings partners with Harris Poll to annually survey 150,000 self-identifying LGBTQ constituents across the U.S. for their views about a company’s brand awareness, brand image, brand loyalty and how the firm supports the community. As noted in its prospectus, 25% of the index’s weighting is derived from that survey data.
“Now is the right time and my predecessors were just a little too early. I also don’t think that they had the curb appeal of engaging the community constituents, and where you really get their voice and data,” Blair says, noting the LGBTQ Loyalty Holdings has prominent LGBTQ advocates on its board of directors, including former U.S. Rep. Barney Frank and tennis star Martina Navratilova.
This type of surveying doesn’t come cheap, and Blair says the cost of the polling is part of the reason why the LGBTQ + ESG100 has an annual expense ratio of 0.75%.
But an annual cost of 0.75% could be an issue for ETF investors used to cheap funds. The shuttered ALPS and InsightShares ETFs at the time cost 0.75% and 0.65%, respectively. For comparison, the biggest large-cap ESG ETF, iShares ESG Aware MSCI USA ETF
has a 0.15% expense ratio. High fees mean high hurdles to keep pace with the performance of benchmarks.
LGBTQ Loyalty Holdings launched the index in November 2019 to get live performance data. Between November 2019 and April 2021, the index generated at 43.8% return versus the S&P 500’s
“The index had a bias toward what was working over that period,” says Brett Manning, senior market analyst at Briefing.com.
Manning suggests public appetite for an LGBTQ-focused ETF may be greater since retail investors have a much broader acceptance of ESG investments, even if the fee is high.
“Part of paying those 75 basis points is to get the value of using their investment money to support companies that support the world the way they want it to be,” he says.
In addition to the community survey, Blair says the index uses the Corporate Equality Index to narrow down companies in the S&P 500, and firms must have a strong corporate financial rating as deemed by Fuzzy Logix. The index provider also kicks out traditionally off-limits ESG sectors such as guns, tobacco and pornography.
Andrew Poreda, ESG analyst for financial advisory firm Sage Advisory, says while ESG means something different to every investor, he has some concerns about this fund.
From strictly an investment standpoint he says it doesn’t look like a traditional passive product because combining the survey data with a company’s sales growth figures brings an active element, which affects the index’s universe of holdings.
“This index has a lot of moving parts,” Poreda says, noting that in addition to the survey, the prospectus explains that the weighting of holdings are based on volatility calculations, price-to-earnings ratios and market-cap. Smaller large-cap stocks such as Estee Lauder get a higher weighting than Netflix
which is much further down the list.
“To me that makes it harder to follow as an investor, because what I’m looking at just doesn’t look the same way (as a traditional passive product), just from that perspective alone,” he says.
While the survey data makes the fund unique, Poreda isn’t sure that addition makes it worth the cost.
“You could get … other ESG ETFs with similar holdings, similar kinds of ESG credentials, similar impacts to the LGBTQ community from how the companies are operating. And you could do it for 15 basis points or less,” he says.
Debbie Carlson is a MarketWatch columnist. She doesn’t own any of the funds or stocks mentioned in this article. Follow her on Twitter @DebbieCarlson1.