AMERICAN VALUES-DRIVEN ETFS

I have written a lot in my blog analyzing and differentiating ESG, sustainable and impact ETFs.  In 2020 and 2021 on a percentage basis, this segment was among the fastest growing in the ETF marketplace. Moreover, during most of that time, the market performance of these funds validated the concept that investing in ESG ETFs did not require sacrificing returns. In 2022, the stocks of many of these funds feel out of favor of some of these funds had returns even more negative than the S&P 500. However, most of the investors, especially on the impact side, understand that these value-aligned investments are for the long-term and will occasionally suffer negative performance.

Recently however, there has been a lot of pushback against ESG investing including but well beyond sub-index returns in recent months.  In the USA in recent, many Republicans including former Vice President Mike Pence in a Wall Street Journal Editorial railed against ESG.  Elon Musk recently echoed these sentiments.

A key excerpt follows, “the shift is entirely manufactured by a handful of very large and powerful Wall Street financiers promoting left-wing environmental, social and governance goals (ESG), and ignoring the interests of businesses and their employees.”

In response, Morningstar ESG expert Jon Hale wrote a scathing article that was reprinted in the ESG Advisor entitled, “Why the Right Hates ESG” where he refutes Pence’s and claims of other GOP politicians.  It is also receiving a lot of attention in LinkedIn and other social media.

Elsewhere, from a statistical perspective, I have written articles, available upon request, evaluating the data from ESG ratings providers.  Since there are more than a dozen providers, no two of which rate every company the same, and most of the ratings providers (S&P Global, MSCI, Morningstar/Sustainalytics, Refinitv, ISS ESG, etc.) use disclosed statistical formulas to calculate their ratings, Musk’s and Pence’s claim that the ratings are subjectively manufactured is rather outrageous.  The devils of the ratings are in the details and there is certainly not uniform agreement in the ratings companies assign or how they calibrate their formulas.

One commonality is that the underlying data points are based upon the concept of accepted best practices.  Most of these, such as employee training, eliminating “poison pills”, minimizing fines levied due to government violations, ethical behavior, etc., have been shown in research pieces to result in superior income statement performance over periods 5 years and longer.  In other words, following best practices is representative of companies that are proactive, not reactive.

That said, let’s look at the origins of ESG and some ETFs that align personal values that could not objectively be classified as left-wing. Some of them come directly for the origins of socially responsible investing (SRI), Since 1928 in the USA, SRI mutual funds had their original roots in avoiding investments in companies engaged in “sinful” practices according to various church doctrines.  In the 1980s, this became expanded to include ethical violations, human rights problems, acting against the interests of shareholders and the public, and environmentally dangerous practices.  Mutual fund companies such as Calvert, Pax World (now Impax) and Domini all had their roots in religious and corporate citizenship values.

Investors concerned primarily with the environment and/or social change are not the only groups looking to align their investments with personal convictions and values. There are more than a dozen US-domiciled and listed ETFs that provide socially responsible investing aligned with Christian and patriotic values.  We analyze six such funds, three aligned with Christian values and three aligned with what the issuers consider to be American patriotic values.

BIBL, Inspire 100 ESG ETF. BIBL uses the Inspire Impact Score methodology to seek out investments in the most inspiring, biblically aligned companies in the U.S. applying a faith-based perspective to environmental, social and governance (ESG) criteria when evaluating a company’s operations. The ETF holds US large-cap stocks that align biblical values with positive impact on the world as measured using various environmental, social, and governance (ESG) criteria. The methodology excludes stocks with any degree of participation in activities such as abortion, gambling, alcohol, tobacco, human rights’ violations, pornography and promoting alternative family lifestyles. Index components are reviewed semi-annually and rebalanced annually.

FEVR, Inspire Faithward Large Cap Momentum ESG ETF is actively managed to FEVR is actively managed seeking to maximize growth with lower volatility than the broader U.S. Large Cap stock market. To do this, FEVR combines the subadvisor’s expertise in technical analysis with high long-term growth potential based on the company’s financial health, earnings trends, valuation, risk and relative strength.  Companies involved in abortion, gambling, alcohol, tobacco, human rights’ violations, pornography and promoting alternative family lifestyles are excluded from the portfolio.

TPHD, Timothy Plan High Dividend Stock ETF. TPHD tracks a volatility-weighted index of US high dividend large-caps screened for Christian values. TPHD sets its universe by selecting from a parent index of high dividend volatility-weighted US large-caps. From there, the fund adds its values-based screen using Biblically Responsible Investing (BRI) criteria. The Fund will not knowingly invest in securities issued by any company involved in the production or wholesale distribution of alcohol, tobacco, or gambling equipment, gambling enterprises, or which is involved, either directly or indirectly, in abortion or pornography, or promoting anti-family entertainment or alternative lifestyles. Among qualified stocks, the funds index will select the 100 highest-yielding.

FLDZ, RiverNorth Volition America Patriot ETF. Offered as part of the True Shares family of ETFs, FLDZ is designed to do double-duty as a US-focused core equity portfolio and supporting patriotism by donating all profits and the majority of advisory fees derived from managing the Fund to Folds of Honor, a nonprofit organization providing the families of fallen and disabled service members with educational scholarships. The actively managed ETF seeks capital growth through a diversified portfolio of US-based, US publicly listed companies that are tied to the economy of the US. A key differentiator is that companies selected for the portfolio must generate at least 90% of their revenues in the United States.

ACVF, American Conservative Values ETF. ACVF is an actively managed fund which seeks to invest in 400 to 600 US large cap companies across all sectors that represent "political conservative values." The adviser continually evaluates companies for inclusion based on financial reporting and data sources, such as, but not limited to: press releases, social media, advertising, lobbying efforts, data from Federal and State Election Commissions, market research, surveys, polling, as well as Fund Investor sourced research and opinion. A process of nomination also takes place quarterly, where Fund Investors may vote to include a company into the fund. A winning nomination is not binding, and final inclusion is still at the discretion of the adviser.

EGIS, 2ndVote Society Defended ETF. EGIS is an actively managed fund of large- and mid-cap US companies that meet 2nd Amendment and border security social criteria. From the remaining eligible stocks sub-adviser Laffer Tengler Investments, Inc., (LTI) selects between 30 and 40 stocks it deems most likely to generate the best shareholders returns using fundamental quantitative and qualitative analysis factors.

For our statistical comparison, we use two benchmarks for the Nasdaq-100 index inspired ETFs: VOO, the Vanguard S&P 500 ETF and ESGU, the iShares ESG Aware MSCI USA ETF.

	BIBL	FEVR	TPHD	FLDZ	ACVF	EGIS	ESGU	VOO
ETF Name	Inspire 100 ESG ETF	Inspire Faith-ward Large Cap Mom. ESG ETF	Timothy Plan High Dividend Stock ETF	River-North Patriot ETF	American Conservative Values ETF	2ndVote Society Defended ETF	iShares ESG Aware MSCI USA ETF	Van guard S&P 500 ETF
Inception Date	Oct 2017	Dec 2020	Apr 2019	Dec 2021	Oct 2020	Nov 2020	09/07 2010	09/07/2010
Assets Under Mgmt.	$283 Million	$35.3 Million	$164 Million	$4 Million	$32 Million	$24 Million	$22.9 Billion	$260 Billion
VE Rating	3	4	N/A	N/A	N/A	N/A	3	3
MSCI ESG Rating	AA	AA	AA	A	A	A	AAA	AA
YTD Price Return	-17.4%	-17.7%	+1.8%	-7.3%	-12.7%	-6.2%	-14.9%	-13.0%
Historic 1 mo. Price Return	+1.6%	+3.0%	+2.1%	+1.5%	+0.4%	+2.3%	+0.2%	-0.1%
Historic 3mo. Price Return	-6.4%	-6.0%	+3.8%	-2.1%	-4.1%	-3.1%	-5.1%	-4.4%
Historic 1-Yr. Price Return	-9.3%	-8.6%	+8.9%	N/A	-0.9%	+3.2%	-4.0%	-1.3%
Historic 3-Yr Ann. Price Return	13.9%	N/A	13.2%	N/A	N/A	N/A	15.1%	15.0%
Historic 5-Yr Ann. Price Return	N/A	N/A	N/A	N/A	N/A	N/A	13.1%	13.1%
Volatility	18.9%	21.8%	19.8%	N/A	15.4%	15.0%	16.9%	16.6%
Beta	1.10	1.14	0.96	N/A	0.93	0.88	0.99	1.00
# of Stocks	100	37	100	306	387	37	319	500
P/B Ratio	6.1	5.1	3.0	2.7	4.4	4.1	4.7	4.6
P/E Ratio	28.1	25.0	18.2	18.9	23.4	18.1	24.1	23.2
Div. Yield	1.1%	1.1%	1.9%	1.9%	0.2%	0.2%	1.3%	1.5%
Expense Ratio	0.35%	0.80%	0.52%	0.76%	0.75%	0.75%	0.15%	0.03%
% from Top 10 Holdings	47%	49%	N/A	N/A	N/A	N/A	42%	44%
Largest Holding Pct.	ServiceNow NOW 1.4%, VE3	Texas Pac. Land TPL 3.6% VE2	Southern Co, SO 1.5% VE3	Antero Resources AR 0.7% VE2	Microsoft MSFT 6.8% VE2	O’Reilly Auto ORLY 4.5% VE2	Apple AAPL 6.5% VE3	Apple AAPL 7.0% VE3
Index Provider	Self-Indexed	None - Active	Victory Shares	None - Active	None - Active	None- Active	MSCI	S&P Dow Jones
Index Scheme	Mkt. Cap Weighting	None - Active	Score-weighted	None - Active	None - Active	None- Active	Mkt. Cap Weighting	Mkt. Cap Weighting
ETF Sponsor	Inspire	Inspire	Faith Int’l (FIS)	True Mark/ River-North	Ridge-line Research	2nd Vote	Van-guard	Van- guard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Observations

1. From a past 12-month performance perspective, TPHD, the Timothy Plan High Dividend ETF is clearly the winner.  Its 12-month price return of +8.9% is 1020 (+10.20%) basis points higher than VOO and 1700 basis points higher than Inspire 100 ESG Biblically Responsible ETF, BIBL, the AUM leader in the Biblically Responsible Investing ETF space. TPHD also was alone in achieving positive year-to-date and three-month price returns.  Returning to its methodology description, the index used by TPHD screens for the top 100 stocks combining above average dividend yield with low volatility. The ETF also has the second lowest P/E and P/B valuations, both considerable below VOO. The distribution dividend yield of 1.9% is close to 25% higher than VOO and tied with FLDZ for highest. As we’ve detailed recently in other blogs.  This underlying strategy has powered the top-performing industry-diversified ETFs during the past 12 months.  TPHD appears to be a solid choice for conservative income-oriented investors who wish to limit their underlying investments to the stocks of companies in compliance with their Christian values. As can be seen by the underperformance of its three-year price return, TPHD should be expected to participate in positive returns but underperform VOO and earnings-growth themed ETFs in higher-than-average return markets.   

2. Although it is has the worst rate of return this year, FEVR, Inspire’s Momentum ETF is the only one rated by ValuEngine for above-average performance during the next six-to-twelve months.
    
3. The three Biblically Responsible ETFs all have AA ratings (second best) from MSCI, the same as VOO lower only than the AAA (highest) of ESGU (almost by definition).  In listening to many of my colleagues in ESG investing, many consider it a truism that Christian investing portfolios are the antithesis of ESG portfolios.  It is simply not true.  More than 50% of the holdings in BIBL and FEVR and just below half of those in TPHD are also in ESGU. 

4. FLDZ and TPHD have the lowest concentration of their assets from the top 10 holdings, 8% and 14% respectively. EGIS is the only ETF with a lower P/E ratio that TPHD.  EGIS is the second top performer for 12-months, 3-months and year-to-date, handily outperforming VOO in all three categories. ACVF has also outperformed VOO and ESGU in all four measurement periods since inception. In its 5+ months of existence, FLDZ also performed better than VOO and ESGU in the past 1- and 3- months as well as year-to-date.

Conclusions

From a past performance perspective, only the two Inspire ETFs, BIBL and FEVR have delivered less than inspirational performance since inception. However, the limitations of past performance as a guide to future performance are well known. 

From a portfolio construction perspective, I consider rules-based BIBL to provide reasonably prudent and diversified portfolio construction while defining well and meeting its values-based objective. TPHD, the other-rules based ETF, has executed its mandate very well since inception.  The other four ETFs, all launched since the SEC instituted rules in 2019 that made active ETFs easier to launch and operate, spell out very prudent active portfolio construction methodologies and rules by which they remain true to their values.  Moreover, the discrete time periods when active funds even in the antiquated redeem-at-distributor model have been able to out perform have been in precipitous downturn when the market implicitly readjusted weightings of top-heavy and overvalued indexes.  Therefore, all six ETFs reviewed here seem like prudent investments from the perspectives of portfolio construction and portfolio performance.  I would venture a guess that this may prove to be especially true if the market suffers volatility and overall return stagnation due to stagflation as it did in the 1970's.  I, personally, am not predicting stagflation but the majority of economists are so why not be prepared with income-oriented Conservatively managed funds with reduced volatility as offered by TPHD, EGIS and ACVF.  Of these, TPHD  is especially attractive to investors in search of better dividend income than VOO.

There are two potential concerns for which prospective buyers of all four active ETFs (ACVF, EGIS, FEVR, FLDZ) need to be aware: potential closure and liquidity. All four have AUM under $50 million which many ETF “Death Watchers” claim to be the minimum threshold of viability.  For many reasons, I believe this to be overstated and believe the threshold to cover their operational costs for ETFs that hold US-listed stocks of greater than $100 MM market cap to be closer to $15 million. 

From a liquidity perspective, there are two things to know. The first is that the liquidity of the ETF comes from its underlying securities. All four ETFs own very liquid US securities so a market maker should be able to provide a bid within a very tight spread even if the bid and ask on the screen might be 10 basis points apart.  The second thing advisers and traders need to know and should know is that a limit order will take care of this problem most of the time. The exception is when you need to liquidate to get the money on that day.  In general, all investors should avoid that situation.

Furthermore, I also am in the minority of veteran ETF pundits who believes that under the new rules, the ETF structure evens the playing field, thus wiping out the historical advantage that passive cap-weighted ETFs have over active ETFs using the antiquated redeem-daily-in-cash traditional mutual fund structure.   See my paper research paper here: 

Therefore, I believe ACVF, EGIS and FEVR to be fundamentally sound and reasonably prudent alternatives for investors that share the values stated by the funds.  Unfortunately, FLDZ is currently well below that level of viability.  As someone who has written a published paper about military diversity, inclusion and training as an ESG factor, I have a rooting interest in seeing FLDZ succeed in its quest to help veterans and domestically focused companies at the same time.

Another consideration that investors should know is that even if the ETF sponsor makes the decision to liquidate the fund, the fund’s underlying stocks still support the fund at NAV.  Therefore, investors will get out whole.  An ETF liquidation is NOT a bankruptcy so even with FLDZ, there should be no fear of losing everything, just fear of the disappointment of having a fund you invested in need to liquidate.

The relative paucity of AUM in these values-aligned-ETFs as compared with impact-, sustainability-, and ESG-aligned ETFs is considerable.  To be accurate, BIBL anfd FEVR also take environmental impact into account but perhaps a bit less focused than the three I just mentioned. The total assets in all of these ETFs combined is less than 0.4% of the assets in ESGU alone.   

So, why bother writing a column about these ETFs, especially when my personal values are more aligned with more environmentally focused and social-justice ETFs such as ECOZ, STNC and ESGA? It is because as someone 65+ now living in Florida, I find myself speaking every week with people bemoaning the fact that there are no mutual fund or ETF options that match their personal values and convictions.  Hopefully, this column will help make advisers aware that these options exist when speaking with clients they know to be deeply religious and/or patriotic.  These funds might be especially germane to older investors looking for conservatively managed ETFs that generally offer positive if lower equity returns during up markets that tend to hold up better in down markets. These are investment goals shared by many clients whose personal values are more driven to a sustainable planet and social progress. As is the case with US equity ETFs and mutual funds, all investors are more similar than different with respect to each other. We want to know what our options are and seek information and/or stewardship in finding the right ones for us.