ETFs for Gender-Lens Investing

Last Tuesday was International Women’s Day.  For the eighth straight year Women in ETFs, the standard bearer for promoting gender bias reform in the ETF industry, held bell-ringings and special programs around the world to commemorate the occasion.  There have been a number of research studies demonstrating examples that having female representation in the C-Suite, on boards, and in decision-making roles helps to identify companies with better returns on equity.   In many cases, offering investment returns that are superior to those that do not do so.  

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A study I authored in 2019 demonstrated that companies that implemented extensive programs to hire and train military veterans also produced superior investment returns in subsequent periods, especially during market downturns.  One of the most salient arguments as to why diversity and inclusion (D & I) has evidently produced better downside risk control is that it mitigates against corporate groupthink and forces more contingency risk discussions.  It may well be that D & I is not only good policy, but also a solid corporate investment.  More statistical research would be needed before declaring diversity and inclusion a validated “smart beta” factor.  Eventually, despite the skeptics, gender diversity may well garner official recognition.

Accordingly, using information from FactSet Analytics Insight made available through, let’s look at the four ETFs promoting gender diversity and inclusion:

Current ValuEngine reports on these ETF’s can be viewed HERE

WOMN, Impact Shares YWCA Women’s Empowerment ETF – Impact Shares teamed with the YWCA of Metropolitan Chicago, Morningstar Indexes and Equileap to develop the ETF.  The Rockefeller Foundation was an initial primary seeder using funds from its Zero Gap Portfolio.  WOMN looks to capture the performance of US large- and midcap stocks of companies that are empowering to women, with risk and return characteristics similar to the index’s large- and midcap equity universe. The fund’s ESG research provider considers four factors to calculate a gender diversity score for each eligible firm: gender balance in leadership and workforce, equal compensation and work life balance, policies promoting gender equality, and commitment, transparency, and accountability to women’s empowerment. WOMN’s index uses an optimization algorithm to select a portfolio of about 200 companies with the highest scores, while maintaining marketlike risk and return. Additionally, companies involved in serious ethical controversies or certain industries (such as weapons, gambling, or tobacco) are excluded from the index.

SHE, SPDR SSGA Gender Diversity ETF – SHE seeks out companies that employ women in high-level leadership roles. The fund evaluates the 1000 largest US firms for the ratio of women on the board of directors and in executive positions (defined as Senior VP or higher). Companies ranking in the top 10% in each sector are included in the portfolio, with the caveat that each firm must have at least one woman on its board or as CEO. Firms are selected by sector and weighted by market cap with an individual capping weight of 5%. Launched in March 2016, SHE’s performance shouldn’t depart radically from the broad market.

FDWM, Fidelity Women’s Leadership ETF – FDWM is an ETF version of a mutual fund Fidelity made available years earlier. The fund seeks to identify high-performing global stocks that prioritize and advance women’s leadership and development. Such firms should (i) include a woman as a member of the senior management team, (ii) have women directors comprising at least one-third of the board, or (iii) in the opinion of the fund adviser, have adopted policies designed to attract, retain and promote women. To select securities, the fund adviser looks for companies committed to female leadership and development that can grow earnings and have resilient business models with a solid competitive position. FDWM utilizes an active approach in a non-transparent structure. It only discloses its full holdings monthly, with a 30-day lag. A ‘tracking basket’ is published daily on its website, in place of the actual portfolio.

EQUL, IQ Engender Equality ETF – EQUL focuses on companies that promote gender equality. Starting with an index universe of 1000 US large-caps, the fund initially screens out companies that are involved in certain controversial activities: unconventional fossil fuels, nuclear energy, weapons, norms-based research, and other controversial businesses. Additionally, companies identified to be engaged in unethical business practices for the past two years are also excluded. Remaining firms are then scored and ranked based on four gender diversity factors: gender balance in leadership & workforce, equal compensation & work life balance, policies promoting gender equality, and commitment, transparency & accountability. The fund’s concentrated portfolio consists of 75 firms with the highest scores.

Of the above funds, only SHE and WOMN have ValuEngine ETF reports available. EQUL has insufficient history and FDWM is characterized by FactSet Analytics as a nontransparent fund, meaning that the names of the stocks it currently holds are not available.  Two benchmarks are included to evaluate these funds, ESGU, iShares ESG Aware MSCI USA ETF with more than $23 billion under management along with SPY, SPDR S&P 500 ETF Trust.  

We also include the MSCI ESG Fund Rating provided on reports. The MSCI ESG Fund Rating measures the resiliency of portfolios to long-term risks and opportunities arising from environmental, social, and governance factors.  It is an indicator of how well an ETF meets comprehensive ESG objectives.  The comparative data are included in the following table.

Current ValuEngine reports on these ETF’s can be viewed HERE
ValuEngine Rating 3 4 N/A N/A 3 3
MSCI ESG Score 7.9 7.9 8.9* 8.2 8.7 7.8
Start Date Feb-17 Mar-16 Jun-21 Oct-21 Dec-16 Jan-1993
VE Forecast 6-mo. Price Change +1.9% +2.8% N/A N/A +2.0% +2.0%
VE Forecast 1-yr. Price Change -2.6% -2.4% N/A N/A -2.6% -2.8%
Historic 1 mo. Price Change -5.3% -7.3% -2.9% -4.2% -5.2% -4.6%
Historic 3 mo. Price Change -14.5% -15.8% -8.2% -3.9% -12.2% -10.8%
Historic 1-Yr. Pr. Change  +1.6% -10.8% N/A N/A +4.0% +6.7%
Historic 5-Yr Ann. Pr. Change  13.0% 6.5% N/A N/A 12.8% 12.3%
Volatility 18.9% 18.0% 19.9% 17.5% 16.6% 15.9%
Sharpe Ratio  0.7 0.4 N/A NA 0.8 0.8
Beta 0.99 1.09 1.18 1.18 1.02 1.00
# of Stocks 201 194 99 77 321 500
Undervalued by VE % 57% 62% N/A N/A 51% 53%
P/B Ratio 4.2 4.5 N/A 4.0 4.7 4.7
P/E Ratio 22.8 32.7 N/A 30.8 25.4 25.5
Div. Yield 3.6% 0.8% N/A 1.9% 1.1% 1.4%
Expense Ratio 0.75% 0.20% 0.59% 0.45% 0.15% 0.09%
Assets (AUM) $35 MM $244 MM $3 MM $6 MM $23.4 Billion $385.7 Billion
Active or Indexed Indexed Indexed Active Indexed Indexed Indexed
ETF Sponsor Impact Shares SPDR by SSgA Fidelity IQ Shares by NYLIM iShares by Blackrock SPDR by SSgA 
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Key Observations:

  1. Since all four ETFs have similar objectives of emphasizing stocks faring best in a series of metrics reflecting the best opportunities for women in decision-making roles, people not familiar with all aspects of indexing methodologies might expect about a 50% or more agreement in the top 10 holdings of each.  However, since the devils are always in the details, only American Express (AXP) is in all four ETFs. (CRM), Accenture (ACN) and Coca-Cola (KO) are all present in three of the all four ETFs even though KO has been hit with recent criticism from the ESG community for water usage and treatment issues.
  2. In terms of portfolio composition, WOMN has the highest average market cap and EQUL has the lowest large cap and the highest midcap exposure.  All four underweight the tech sector relative to SPY with EQUL giving it the lowest rating.  SHE has more than four times the weight of SPY Consumer-Discretionary category with Disney (DIS), NIKE (NKE) and NETFLIX (NFLX) all in its top ten. All four qualify as true ESG funds with higher MSCI ESG ratings than SPY. FDWM has the best MSCI ESG rating of the group (shown in italics with an asterisk in the table since it is based on the last published holdings of the fund from the prior quarter) with 8.9/10; EQUL, the newest fund, has an MSCI ESG rating of 8.2/10, better than the 7.9 posted by both WOMN and SHE.  The fact that FDWM has such a high rating rings similarly to our recent blog on environmentally sustainable ETFs and comments by Jessica Ferringer in  The flexible nature of active management combined with daily portfolio oversight may give active ESG ETFs an edge in lowering or removing holdings suffering negative ESG events not yet factored in by the data providers.
  3. SHE has $244 Million in AUM making it the largest ETF fitting the category by a wide margin.  In 2017, SHE was recognized by at its awards ceremony as the most important launch of the prior year. It preceded the launch of ESGU, now the AUM leader in the ESG ETF space, by nine months.  California teacher pension fund CalSTRS helped develop the fund’s methodology based on volumes of research by groups such as McKinsey and Catalyst; CalSTRS also provided most of its preliminary seed investment.  SHE has been described as “Where Gender Diversity and Smart Beta Meet.”  Until the past 12-month period of dreadful underperformance, SHE had lived up to that billing, having beaten the S&P 500 since inception.  What a difference a year makes!  
  4. WOMN, second in AUM, posted superior performance to SHE in all four of the historical time periods measured in the table.  In fact, its annualized 5-year performance was a healthy 13%, 70 basis points (0.70%) better than SPY, the S&P 500 standard-bearer that is the oldest and largest US ETF. 
  5. FDWM is one of several actively managed mutual funds now made available from Fidelity Investments in the more modern and efficient ETF structure, albeit a nontransparent design. In its ETF form, it has only been in existence nine months but has the best one-month and ranks second in three-month performance amongst the entire group.  This is just conjecture but the fund’s lack of daily constituent transparency may be one reason contributing to its dearth of AUM.  Institutional ESG-aware investors don’t want to discover too late that one of the undisclosed holdings was the stock of a company the investment board might find objectionable.
  6. EQUL weathered the past three-month maelstrom far better than its peers.  It endured just a 3.9% decline while placing second in one-month decline.  New York Life Investments just rebranded their ETFs, formerly Index IQ, as IQ.  

An issue with ESG ETFs in general but especially those with diversity-and-inclusion objectives is how the proxies are voted.  WOMN and all of its sister ETFs offered by Impact Shares have very ESG-focused proxy-voting guidelines.  SPDRs has general policies on ETF proxy voting with added guidelines for SHE.  As far as I could determine from fund literature and the web, EQUL and FDWM have no proxy voting guidelines specific to ESG or D & I issues.  Sadly, this usually means voting proxies with male-dominated management teams that are “old school” more often than not.  

An interesting new alternative is VOTE, the first of two ETFs offered by California Hedge Fund Activist Engine No. 1.  VOTE  is an index fund mimicking a broad-based US benchmark maintained by Morningstar Indexes.  Its distinction is having extensive ESG-conscious proxy voting guidelines. The ETF division’s CEO and CIO are both women, Jennifer Grancio and Yasmin Bilger respectively.  During the last 10 years, most constructive corporate improvements in ESG-related practices have come as a result of two-types of efforts: regulatory/legal engagement and corporate engagement.  VOTE gives investors a tangible way to get involved in influencing companies proactively.  It also has the best MSCI ESG rating of the group.  That rating is shown in italics with an asterisk in the table since it is based on the last published holdings of the fund from the prior quarter.  Regarding investment returns and risks, VOTE is slightly less concentrated than SPY in accessing an ETF for a fund’s US Large Cap Core allocation.  Hence, investment performance statistics will be very similar.

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Regarding performance recommendations of the four gender-focused ETFs in the analysis: They are based on industry research findings that superior work environments supporting women in decision-making roles lead to superior corporate performance and investment returns.  In fact, WOMN has better historical performance than SHE and has only a slightly lower forecast for future performance.  After outperforming from inception through the first two months of 2020 SHE endured a miserable last twelve months of performance and WOMN has performed much more in-line with, and more recently has held up better, than SPY.  That said, SHE is projected by ValuEngine models to outperform the market during the next six-to-twelve months with a rating of 4 as opposed to a 3 (market performer) for WOMN.   I believe both to be fine choices now for diversion of core index money as they are well-diversified portfolios similar in risk composition to the S&P 500 with better ESG-risk composition and a bit less exposure to the tech sector.  Actively managed FDWM and equally weighted EQUL are both intriguing and both outperformed WOMN and SHE during the past 3 months.  Both, in my opinion, have more potential to outperform major indexes significantly.  However, the small AUM figures and lower trading volumes along with very short histories will likely force many potential investors to wait another quarter or two before committing assets.  Allocations to WOMN and SHE might be more prudent at this time.

By Herbert Blank

Senior Quantitative Analyst, ValuEngine Inc


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