Some ETFs combine investing with charities — must you?


As investors increasingly seek to do good with their money, some companies behind Exchange Traded Funds add a twist: a direct association with a charity like the American Heart Association, the Susan G. Komen Foundation, or the NAACP.

ETF issuers hope to capture some of the growing popularity of environmental, social and governance investments, where investors seek to balance their personal values ​​with their wallets. In 2020, the US SIF Foundation, which measures this type of investment, stated that 33% of US assets under professional management use ESG criteria when investing.

That begs a question for investors: Does the connection between philanthropy and investment blur the line between the two goals?

Fund managers who stand behind these so-called impact funds undertake to finance the non-profit organizations through direct donations or part of the fund’s expense ratio. The funds that refer to the cause in the name or ticker symbol are usually custom indices, one reason why they are more expensive than other index funds that focus on the sector or theme.

Not only do the funds seek to own companies that positively reflect the organizations’ mission through ESG metrics, but by donating directly to nonprofits, they seek to have a direct impact on these causes.

However, investors should focus primarily on the fund’s investment strategy and second on its philanthropic goal, said Jon Hale, global head of sustainability research at Morningstar.

While these types of funds are easy to dismiss as a marketing gimmick, investors are looking for ESG products that they can really embrace, he added.

Brian Kelleher, Simplify Asset Management’s chief revenue officer, agreed. “There is no reason to invest in a mediocre product to do good. The people are savvy investors; They want to find products that work well so they can do good, ”he said.

The funds and their charities

The first Impact Funds were launched three years ago when the non-profit fund company Impact Shares launched the NAACP Minority Empowerment ETF NACP, -0.87% and the YWCA Women’s Empowerment ETF WOMN, -1.12%..
At least five more were created this year, with another expected in January.

The ETF issuer IndexIQ has teamed up with New York Life Investments to issue four themed ETFs: Heart health through the IQ Healthy Hearts ETF HART, -1.12% with the American Heart Association; clean oceans through the IQ Clean Oceans ETF OCEN, -1.33% in association with Oceana; Gender Equality in the Workplace by the IQ Engender Equality ETF EQUL, -1.11% in favor of Girls Who Code; and the transition to environmentally friendly transportation, IQ Cleaner Transport CLNR, -1.38%,
Support to the National Wildlife Federation. All are passive funds that track custom indices.

ETF issuer Simplify launched its multi-cap, actively managed Simplify Health Care ETF PINK, -0.69% during breast cancer awareness month in October to help the Susan G. Komen Foundation.

There is another ETF on filing and slated for launch in January, the RN Volition America Patriot ETF, an actively managed fund that will donate some of its fees to grants for military families through an organization called Folds of Honor.

Wendy Wong, head of sustainability investment partnerships at New York Life Investments, said the company started investing for the four ETFs and then worked with the nonprofits to create the criteria for each custom index.

“We look at the macro level, where are we convinced, where we think the trends will be and what kind of companies will benefit from these trends,” she said.

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New York Life pays 0.10 percentage points of the 0.45% annual expense fee of each ETF to its dedicated organization. As the ETFs collect assets, they make an undisclosed “substantial donation” to each group.

She says New York Life worked with the four nonprofits on how the groups would use the contribution to fund specific programs related to the ETF strategy. For example, the Healthy Hearts ETF supports the American Heart Association’s Social Impact Fund to fight cardiovascular disease and help people develop healthy eating and fitness habits. Stocks in the bespoke IQ Candriam Healthy Hearts Index include Apple AAPL, -0.65%,
NIKE, -0.84% ​​and Merck MRK, -0.29%.

The Simplify Health Care ETF started with an internal discussion on ESG and how the company could approach socially responsible investing, as most companies “had a cynical view of ESG as it stands,” said Kelleher. By creating an ETF with fees going to an organization, it provides a direct link to the potential impact.

You chose breast cancer research because Simplify co-founder Paul Kim is a board member of the Komen Foundation and many of the company’s employees have a concern, he said. They chose an actively managed healthcare fund and hired Michael Taylor, who managed healthcare stock portfolios with leading hedge funds for more than 20 years, as senior portfolio manager. The fund focuses on biotechnology, medical technology and other health sectors; One of the largest holdings is the UnitedHealth Group UNH, -1.16%,
Pfizer PFE, -2.89% and Abbott Laboratories ABT, + 0.75%.

The expense ratio is 0.50%. Kelleher said most of that fee goes to the foundation, with less than 10 basis points being used to cover expenses. Simplify is also planning a one-time donation of $ 100,000 to the foundation.

In fact, all impact funds of these ETFs have significantly higher fees than plain vanilla index funds like the SPDR S&P 500 ETF Trust SPY, -1.06%,
which has an expense ratio of 0.09%, or the Health Care Select Sector SPDR Fund XLV, -0.70% to 0.12%. However, according to, the funds are cheaper than the average cost of a thematic ETF (around 0.62%) and the average cost of 0.69% for actively managed ETFs.

Assess the effect

It is still too early to look at the performance of funds that are only a few months old. However, the NAACP Minority Empowerment and Impact Shares YWCA Women’s Empowerment large-cap Impact Shares, which use criteria such as diversity and anti-discrimination guidelines in the creation of the indices, show an annual return of 21.8% and 24.25% respectively over three years versus the SPX of S&P, -1.03% annualized three-year return of 20.5%.

Apple AAPL, -0.65% is NACP’s largest holding, while Nvidia NVDA, -2.06% is WOMN’s largest holding. The NAACP fund expense ratio is 0.49% and the YWCA expense ratio is 0.75%.

None of the funds have given any money to their affiliated organizations as they are not yet profitable. In this case, it means amassing between $ 50 million and $ 100 million, said Ethan Powell, the company’s founder. The NAACP and YWCA ETFs each have around $ 38 million.

But they work in other ways.

For example, following the 2020 murder of George Floyd, a number of blue-chip companies made large donations to the NAACP, Powell said. “But the NAACP went back and said, ‘Thanks for the check. You know, you are not in our fund because your competitor X, Y and Z is doing better than you. So if you really want to be on the right side of history, you need to change your business ethos. And you can start changing these relatively simple policies and procedures and relationships, ”he said.

Debbie Carlson is a columnist for MarketWatch. Follow her on Twitter @ DebbieCarlson1.

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