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ICAN: Social Responsibility and Return in a Single ETF Print PDF
The Invest With An Edge Blog featuring Jason Teed

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. 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.

Serenity Shares TradeMark

Additionally, ESG investing provides a long-term view of profitability. If a company’s resources are finite, then eventually the business model must change to accommodate for the loss of resources. However, 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, 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, launched April 13, 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.

The rise of ESG investing

As the world becomes more connected, society has become more aware of the ways in which people and companies are detrimentally affecting the environment. Additionally, we’ve become more aware of human-rights issues, identifying with others and demanding equal treatment for all. This is most obvious when looking at the millennial generation. 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 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.

Index process

Unlike many other ESG indexes, which are subjective in nature and require a great deal of analysis to quantify ESG data, the SSI Impact Index is passive in nature. First, the index uses six pillars (for example, resource scarcity, societal, environmental, healthy living) and 20 subthemes (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 index itself is reviewed annually and is rebalanced quarterly. Positions are weighted to allow a maximum position of 3.5% and a minimum of 0.5%. Due to the nature of the index, it is underweight in the Energy sector, as many renewable companies are classified as utilities. Additional information is located in the SSI Index methodology paper.

ETF facts

The top 10 holdings of ICAN include a large number of tech firms, such as Google (the largest holding at 4.01%), Apple, and Netflix. However, other types of companies are also present, such as Honeywell, CVS Health Corp, and Disney, 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). Constituents and their reasons for inclusion can be found here.

Sector exposures are heaviest in Industrials, Technology, and Health Care, while Energy is somewhat underweight versus its market-capitalization weight. Additionally, the report notes that mid-caps are also underrepresented, as companies within that range were less likely to meet the index criteria.

ICAN has an expense ratio of 0.50%, and dividends will be paid annually. The fund’s investment advisor is SerenityShares.

Additional information is located in the fact sheet, the ICAN prospectus, and the SerenityShares website.

Disclosure: No communication by Dynamic Performance Publishing or our employees to you should be deemed as personalized investment advice.  Any investment recommended in this newsletter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.  Dynamic Performance Publishing, its affiliates, and clients may hold positions in the recommended securities.  Results are not indicative of holdings for clients of Flexible Plan Investments.  Forwarding, copying, or otherwise duplicating this information for the use by anyone other than the intended recipient is expressly forbidden.  These results are not representative of those achieved by clients of Flexible Plan Investments, Ltd. (FPI) due to differences in security selection, timing of trades, transaction fees, and FPI's management fees.

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© 2017 Dynamic Performance Publishing, Inc. - All Rights Reserved.  This material is protected by copyright laws of the United States and international treaties.  Nothing in this e-mail should be considered personalized investment advice.  Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation.  No communication by our employees to you should be deemed as personalized investment advice.  Any investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.   Any results and performance discussed are not indicative of holdings for clients of Flexible Plan Investments.  Employees of Dynamic Performance Publishing and Flexible Plan Investments, their affiliates, and clients may hold positions in the mentioned securities.

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