ESG strategies have shown the returns potential and demand for principled investments. On International Women’s Day, the question needs to be asked whether gender diversity ETFs have enjoyed similar success.
In October 2017, Lyxor became the first issuer in Europe to launch an ETF, the Lyxor Global Gender Equality UCITS ETF (ELLE), that directly offered exposure to companies that performed well from a gender equality perspective.
UBS Asset Management was the next to follow suit with the launch of the UBS ETF Global Gender Equality UCITS ETF (GENDER) in December 2017 while BlackRock listed the iShares Refinitiv Inclusion and Diversity UCITS ETF (OPEN) in September 2018.
ELLE physically replicates the Solactive Equileap Global Gender Equality Net Total Return index, which uses Equileap data to rank 150 companies that perform well on gender equality criteria in an equally weighted index. The benchmark also excludes companies that derive revenues from weapons sales, gambling and tobacco, and those included on the Norwegian Ethics Council list.
Among ELLE’s largest weightings are consumer goods and retail equities such as Nordstrom, Tapestry, and Unilever – though General Motors, Ford Motor, Royal Mail, Société Générale and ITV are also among its top ten constituents.
Meanwhile, GENDER provides investors with exposure to theSolactive Equileap Global Gender Equality 100 Leaders GTR index via its physical replication methodology.
Like its sister benchmark, the Solactive 100 Leaders GTR Index is based on data provided by Equileap, and ranks companies based on their gender balance in leadership roles; equal pay and work-life balance; gender equality policymaking; efforts towards ensuring transparency and accountability; and excludes companies that are involved in non-ESG sectors.
The GENDER strategy has a strong weighting towards financials equities, with Société Générale, Citi, Metlife, Bank of America, National Australia Bank, and Westbank Banking Corporation making up six of its top ten holdings.
Finally, OPEN tracks the Refinitiv Diversity & Inclusion Total Returns index. This benchmark examines annual reports, company websites, stock exchange filings, CSR reports, news sources and ESG data on thousands of companies, and then scores companies based on ‘diversity’, ‘inclusion’, ‘people development’ and ‘news controversy pillars’, with the top 100 highest-scoring companies being featured in its index.
BlackRock’s product has a 40.2% weighting towards healthcare equities, with Johnson & Johnson, UnitedHealth, Roche Holding, Merck & Co, Eli Lilly & Co, and AstraZeneca, all featuring within its top ten holdings.
Have gender and diversity strategies mirrored ESG products’ fortunes?
Despite the broader theme of ESG striking a chord with investors, gender diversity ETFs have seen mixed fortunes.
GENDER has been the most successfully of the three ETFs by some distance capturing $567m assets since launch while ELLE and OPEN have just $40m and $13m assets under management (AUM), respectively.
In terms of gender diversity strategies’ performance versus the market, the picture has been underwhelming. Over the past year, OPEN, GENDER and ELLE have returned 23.5%, 22% and 15.4%, respectively, versus 27.6% for the iShares MSCI World UCITS ETF (IDWR).
Offering some cause for optimism, the underlying indexes of GENDER and OPEN outperformed some of the more generalised benchmarks created by the same providers.
Since its inception in September 2011, the Solactive Equileap Global Gender Equality 100 Leaders GTR Index saw returns of of 242.4%. Meanwhile, the Solactive GBS Developed Markets Large & Mid Cap USD Index TR grew by 213.5% during the same time period.
Likewise, Refinitiv’s Diversity & Inclusion Index booked returns of 10.2% during the five years to 31 July 2020 – ahead of the 7.2% growth posted by the Refinitiv Global TR index.
Likewise, there is discussion that strategies favouring companies with more diverse leadership will outperform their competitors in the long term.
For instance, while speaking about the advantages of its Women’s Empowerment Index, Morningstar said that the reason why companies with more diverse leadership outperform is because they can leverage a broader range of perspectives to find new ways of solving problems.
Morningstar said: “A number of factors might motivate a commitment to gender equity. Morality is certainly among them. But many for-profit companies view gender diversity as advancing their business goals.
“They might want to burnish their brand, better serve customers, or attract top-level talent. Improved decision-making resulting from a mix of perspectives and problem-solving approaches is another benefit. Research shows that companies that embrace gender diversity perform better.”
While agreeing with this stance, Debbie Fuhr, founder of research firm ETFGI and co-founder of Women in ETFs, said that companies also realise that gender inclusion is a risk factor. Those that do not comply with diversity regulations are not only breaking the law but could incur financial ramifications as a consequence.
Overall, gender and diversity ETFs are yet to have their day in the sun, but investors should be mindful that as more companies diversify their leadership, the increased number of equity picks may allow them to outperform the market.