Can Cathie Wood's New ETF Surge 20% as Investors Embrace the 'G' in ESG?

Limits on 401(k) Contributions

Read the fine print, they say, or face a lawsuit.

Cathie Wood’s new Exchange Traded Fund (ETF) wants to help investors who don’t do that avoid trouble by scoring firms that show transparency in their ‘terms and conditions’ literature high on the list of her new Ark Transparency ETF.

“The score of this indicator generally depends on the length of a company’s terms and conditions document, with higher scores assigned to companies which documents are shorter and simpler to understand than longer and more difficult to understand,” the star investor says in the fund’s prospectus, filed August 31.

The fledging vehicle, ARK’s eighth, will also pick companies based on ‘transparency standards,’ including how they prepare documentation related to privacy and ethics as well as customer and diversity metrics. Those with the highest quality of written reports and/or disclosures will be ranked highest, it adds.

Accountability, greater disclosure

Ark’s fund will also screen holdings for ‘total accountability,’ which examines how many lawsuits a company faces, as well as the nature of those suits, with those caught in financial or accounting fraud getting the lowest marks. Firms open to providing the clearest descriptions of their products and services, such as on their website, will also get high scores, Ark explained.

The passively managed vehicle will track an index of 100 companies with strong transparency standards. Called the Transparency Index, it lists firms with over $1 billion in market cap, excluding those involved in banking, chemicals, confectionary, fossil fuels, mining, gambling, alcohol and tobacco.

‘Very popular’

Most of its components include industrial and consumer firms such as Wood’s favorite Tesla (TSLA) and other household names such as Apple (AAPL), Microsoft (MSFT) and Nike (NKE). The index’s top-three weighted names are largely unknown, however, including Dutch search engine Elastic, GPS technology supplier Garmin and semiconductor player SML Holdings.

“It has a good chance of taking off and become very popular,” says ETF consultant Nizam Hamid. “They are capturing an incredibly important theme. People are interested in investing in companies that have good governance scores. The growing trend in the EU and the US right now is to look at all of a company’s governance components and there is a full package of them.”

Analysts said Ark’s Transparency ETF could mirror or exceed the performance of its biggest rivals, the $8.2 billion Vanguard FTSE Social Index Fund (VTFAX) and the $23 billion iShares ESG Aware MSCI USA ETF (ESGU), which are up over 20% year-to-date.

While Wood’s venture focuses more narrowly on large-cap firms, VTFAX and ESGU invest in both small and large-cap enterprises and follow “a much broader view of ESG scores at company and sector level,” says Hamid. “They are designed to be more widely based strategies rather than following a narrow large cap 100 list.”

Market to double

Wood’s latest bet, which follows the launch of its Ark Space Exploration & Innovation ETF (ARKX) in March, comes at a time when ETF investing linked to ESG is set to roughly double to $618 billion in the next 12 months, according to market researcher EFTGI.

“We are seeing strong growth due to Covid,” says ETFGI founder and managing partner Deborah Fuhr. “People have seen the benefit of having fewer planes, trains and automobiles, bluer and sunnier skies.”

This appreciation for a cleaner environment has extended into social welfare issues such as the Black Lives Matter movement, or LGBTQ rights, and others promoting justice and corporate governance/transparency, encouraging investors to pour funds into vehicles that support these themes.

Fuhr expects the market to broaden, not just with Wood-like ETFS focused on transparency but also those targeting fixed-income corporate and sovereign bonds and new thematic vehicles looking at clean energy or even Bitcoin – the latest of which comes from Canada’s Accelerator.

Despite her move to launch another ETF, Wood’s funds have not performed well this year. With $25.5 billion in assets, her largest and oldest Ark Innovation ETF (ARKK) fund is down 3.5% in the past nine months while her next biggest, the Ark Genomic Revolution ETF (ARKG) ($9.7 billion) has lost 7.7% year-to-date.

In contrast, the S&P 500 is up 22% and the tech-heavy Nasdaq 21%.

Is she overdoing it?

Yet Fuhr predicts the upcoming fund could still do well, given Wood’s fan base and stellar reputation, which she earned as her funds skyrocketed last year, sharply outperforming the market.

Hamid agrees: “At the end of the day, she has succeeded in launching ETFs that capture relevant themes in time. The original ETF [Ark Innovation] has done very well over time so her new fund should be successful at garnering retail assets.”

What if the stock rally takes a breather?

“Even if the bull market doesn’t continue, people will still have equity allocations in ESG,” Hamid concludes. “ESG is becoming incredibly important.”

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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ESG Investing

Ivan Castano

Ivan Castano is a seasoned financial editor, corporate content specialist and journalist with over two decades’ experience writing for leading publications including Bloomberg, Forbes, Barron’s, MarketWatch, Euromoney and FT groups, among many other leading titles. He enjoys writing about the emerging markets, corporate finance, technology and investing.

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