The ETF industry has been evolving, stretching into new markets and niches. The focus on just market capitalization, dividend payments or equal weight is gradually taking the backseat while tricky smart-beta approaches or some socially relevant focused funds are showing up.
In fact, socially responsible ETFs are very much in vogue. Investors appear concerned about the future of the environment and corporate practices, and the effect that these might have on their investing portfolio.
Moreover, growing health consciousness among global consumers, most developed and emerging countries’ aim of building a pollution free environment, and upper hands of human rights have made socially sensitive companies compelling investments for many in today’s market.
Renowned issuers like iShares, Barclays and ALPS have already made their presence felt in this category. In fact, Barclays recently launched a new socially aware product namely Return on Disability ETN (RODI) after rolling out its maiden socially conscious product Barclays Women in Leadership Index in July. The new product hit the market on September 12, 2014.
How the Fund Works
RODI seeks to track the performance of the Return on Disability US Large Cap ETN Total Return USD Index which zeroes in on companies that have very favorable policies towards the disabled, both as customers and workers.
The index follows a quantitative method to gauge a company’s widely visible activities with regard to such people across three important criteria: talent, customer and productivity, per the press release.
The benchmark screens those companies which have the potential to enhance shareholder value by concentrating on user-friendly features in products and services, and implementing productivity-focused process improvements driven by people with disabilities.
The index theoretically looks to track the returns of a portfolio of up to 100 large cap stocks screened on the basis of the Return on Disability Binary Ranking, which is designed by the Return on Disability Group (an affiliate of the Donovan Group LLC). However, the concerned companies should also meet the definite benchmark of market capitalization, trading volume and financial capability.
Some of the top companies in this index include the Walt Disney, PepsiCo and Chevron. It is also worth mentioning that the portfolio is heavy on the consumer discretionary sector (22%). The ETN charges 45 bps in fees.
How Does it Fit in a Portfolio?
Per the press release, about 19% of the entire U.S. population have disability issues. The CEO of the Return on Disability Group noted that people with disabilities account for over 1.3 billion prospective buyers and employees. In a nutshell, the group intends to capitalize on this huge population and enhance shareholder value. Thus, investors seeking an innovative play might find this product interesting.
This ETF falls in the category of socially responsible funds. These sorts of funds consider environmental, social and humanitarian traits while picking companies. In short, companies involved in the manufacture and sales of products like tobacco, alcohol, gambling, and arms and ammunition, are thrown out in many types of socially responsible investing.
The space is not congested yet. The ETF industry has seen only a handful of players as yet, that each target different social services. These ETFs are iShares MSCI KLD 400 Social ETF (DSI), iShares Socially Focused ETF (KLD), Workplace Equality Portfolio ETF (EQLT), Global Echo ETF (GIVE), EcoLogical Strategy Shares ETF (HECO), Pax MSCI North America ESG Index ETF (NASI) and Pax MSCI EAFE ESG Index ETF (EAPS).
Among these, some have seen a reasonable level of success in terms of assets, with the leader is DSI with over $385 million in assets under management, followed by KLD with about $275 million assets.
With Barclays already having tasted some success with its women-run ETN which has garnered about $26 million in assets within just two months of its launch, we expect RODI to have a similar level of success as WIL.
Most importantly, the issuer kept the expense ratio of both the products quite competitive at 45 bps. Notably, other players in the space charge in the range of 50–95 bps making the way easier for this recently launched ETN.
ISHARS-KLD 400 (DSI): ETF Research Reports
ISHARS-USA ESG (KLD): ETF Research Reports
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