Gender equality ETFs delivered best performance yet in 2022

Gender equality exchange traded funds performed better last year than in any year since their inception, with six of the nine ETFs listed in Europe and the US beating their relevant Morningstar benchmarks.

The funds, which had a combined $1.7bn in assets under management at the end of March, are all relatively young, however, and their performance has shown wide variation to one another as well as against their appropriate indices (a gender-focused US large-cap fund is compared to the Morningstar US large-cap index, and so on).

In 2020, for example, the $34mn YWCA Women’s Empowerment ETF (WOMN) rewarded investors with returns of 40 per cent, nearly 19 percentage points above the Morningstar US large mid-cap index. In 2021, however, it underperformed its index by 1.75 points. In the same year, the SPDR MSCI USA Gender Diversity ETF (SHE) underperformed the same index by more than 11 points. Last year both funds did better with WOMN delivering outperformance of 1.49 points against SHE’s underperformance of 2.12 points.

On aggregate, Kenneth Lamont, senior fund analyst for passive strategies at Morningstar said, the funds tend to be underweight technology, which gave them an edge last year. He added that a tilt towards financials, which dropped less than the broader market in 2022, also benefited some of the funds.

The nine ETFs identified by Morningstar that target gender equality achieved relative returns compared to their appropriate index of between -2.74 percentage points and 5.85 points in 2022, according to Morningstar data.

However, with the recent pummelling of global banking stocks, it is easy to understand how performance for such narrowly focused impact funds can be dramatically affected by events that have nothing to do with their theme.

“These funds may be a useful tool to reward companies with strong gender metrics, but live performance of these funds has been decidedly mixed over longer periods,” said Lamont.

But for Ethan Powell, founder of Impact Shares, which offers WOMN and the NAACP Minority Empowerment ETF (NACP) which also has a gender rights focus, too close a focus on returns is misguided.

“Any capital allocation impacts the world around you. The question is how intentional do you want to be,” Powell said.

As one example he pointed out that Impact Shares, as a result of WOMN’s shareholding, launched an activism campaign in the fourth quarter of last year to demand that Norfolk Southern, a US train company, pay sick leave to its employees — something the company has recently agreed to do.

“The Norfolk Southern resolution aligns with [Impact partner] YWCA’s longtime advocacy for economic security for women and families focused on paid family and medical leave, paid sick leave and safe leave,” said Jill O’Donovan, YWCA impact adviser.

Direct engagement to produce measurable change is also a technique that put Engine No. 1 in the headlines after it launched the first activist ETF in 2021. The Engine No. 1 Transform 500 ETF (VOTE) now has nearly $411mn in assets under management. The asset manager, which also offers hedge fund and private equity strategies, has since launched the $105mn Transform Climate ETF (NETZ) and the $9mn Transform Supply Chain ETF (SUPP) that launched in February.

“We don’t believe in divestment. Some of those companies [we invest in] will be the leaders in the transition,” said Yasmin Dahya Bilger, head of ETFs at Engine No. 1.

Investing according to broad environmental, social and governance principles is facing opposition from different quarters following push back in some quarters in the US, and growing regulatory scrutiny following accusations of greenwashing.

But the slew of negative publicity surrounding “sustainable” investing in general might be part of the reason why some of the gender funds have struggled to build scale.

Powell said Impact Shares was trying to enter into an arrangement with an ETF platform which would provide a capital injection and allow Impact Shares’ ETFs to use its distribution network. At present many investors cannot even find Impact’s ETFs through their usual brokerage channels, he added.