(NYSEARCA:HECO) will target companies that “have positioned their business to respond to increased environmental legislation, cultural shifts towards environmentally conscious consumption, and capital investments in environmentally oriented projects.”
Under the Hood
HECO will maintain a portfolio covering a wide range of sectors, as opposed to being limited exclusively to “cleantech” type stocks. Rather, the strategy will seek to identify companies that demonstrate environmental stewardship, and provide products and services that advance green practices and show evidence of sustainability. But the manager will not focus solely on identifying stocks with positive environmental, social and governance (ESG) factors; it will also seek to pick out stocks that are positioned to benefit from changing laws, regulations and consumer behavior [for updates on all new ETFs, sign up for the free ETFdb newsletter].
“Many green funds emphasize nascent technologies like wind and solar because they are clean, without regard to whether that’s a logical investment,” said Randy Bateman, Huntington’s chief investment officer and president of Huntington Asset Advisors. “Our approach looks at those opportunities, but then applies logic around whether or not that company is producing products that are affordable by broad markets.”
Indeed, clean technology companies have been some of the worst performers over the past few years. Some of the ETFs in the Alternative Energy ETFdb Category, which includes both solar power and wind power products, have lost close to 80% of their value over the past three years.
Many of the components of the new ETF are well-known U.S. stocks; the initial holdings include Whole Foods (5.6% of assets), eBay 5.6%), Starbucks (2.9%), Johnson & Johnson, Walt Disney, Ford Motor Company and T. Rowe Price. The portfolio doesn’t include any oil or coal companies.
According to the prospectus, HECO may invest up to about 35% of assets in ADRs of foreign companies. The fund will be managed by Brian Salerno, a Vice President and Senior Portfolio Manager with Huntington Asset Advisors. Huntington had also previously filed details on an actively-managed U.S. Equity Sector Rotation Strategy (HUSE) that would seek to tilt exposure towards corners of the domestic stock market that are expected to outperform.
The investment thesis behind HECO is fairly straightforward: by targeting stocks that are positioned to benefit from the “mega trend” of eco-friendliness and greater awareness of environmental factors, the portfolio seeks to hold stocks that will outperform their peer groups over the long run. Companies that are ahead of the curve in terms of environmental stewardship may benefit from the evolving regulatory landscape and outperform their peer group.
There are a handful of other socially-responsible ETFs out there that cast a wide net across sectors instead of focusing on clean technology companies. HECO, however, will be the first actively-managed ETF with this investment objective. That could be appealing to investors who prefer some degree of management discretion in determining eco-friendliness, instead of a purely rules-based framework.
- iShares KLD Select Social Index Fund (NYSEARCA:KLD)
- iShares KLD 400 Social Index Fund (NYSEARCA:DSI)
- North America Sustainability Index ETF (NYSEARCA:NASI)
- Pax MSCI EAFE ESG Index ETF (NYSEARCA:EAPS)
Expenses on the above ETFs, all of which seek to passively replicate an index, range from 0.50% to 0.55%. HECO, which is actively managed, will charge a net expense ratio of 0.95%.
Written By Michael Johnston From ETF Database Disclosure: No Positions.
ETF Database is committed to giving our audience, consisting of both active traders and buy-and-hold investors, information that, to our knowledge, is truthful and non-biased. [For more ETF insights, sign up for our free ETF newsletter or try a free seven day trial of ETFdb Pro.]