You’ve probably heard about ETFs that focus on sustainable, environmental, social and governance (ESG), and impact investments. They’re generally designed to either exclude companies deemed to hurt society or favor companies that benefit it while also earning profits for investors.
There’s growing evidence that these approaches do not impair performance and in some cases enhance it, but the social impact of these funds remains unclear, which is a concern for some investors and a challenge for ETF creators.
Now some ETFs have adopted a different model to address social issues by dedicating a portion of their revenues to charity. The money doesn’t affect investors’ earnings but rather the profits of their creators.
Infrastructure Capital Advisors (InfraCap) has launched two ETFs that allow the firm to allocate 10% of its revenues to fund Tutoring America, an organization founded by the firm’s founder, CEO and president, Jay Hatfield, that aims to close the education gap among low -income youth.
The donations don’t come out of investors’ earnings but from the revenues InfraCap collects, says Hatfield.
InfraCap MLP ETF (AMZA) is an actively managed ETF, comprising midstream energy master limited partnerships (MLPs) involved in the gathering, processing, transportation and storage of crude oil, natural gas, natural gas liquids and refined products. The $483 million ETF has lost 5.3% year to date, but it yields almost 23%.
InfraCap REIT Preferred ETF (PFFR) invests in high-yielding liquid preferred securities issued by real estate investment trusts (REITs) and tracks the REIT Preferred Stock Index. The ETF has $19.5 million in assets and invests in securities whose yield to worst (lowest potential yield if the security is called or held to maturity) is 3% or higher. Since inception in early February, the ETF has gained 4%, compared with 3.6% for the Vanguard REIT Index ETF (VNQ).
Neither fund is focused on social investing and both have relatively low sustainability ratings from Morningstar, but they do have a social dimension.
“We give about $400,000 a year to six different educational organizations,” says Hatfield. The money provides students with access to tutoring software that can be used in school, in after-school programs, during summer and at home, says Hatfield.
“Twenty-five hours of computer time and assistance from qualified students can advance one’s education for a whole year, says Hatfield, adding that the firm’s employees also benefit from seeing that their work has an additional purpose.
Loncar Funds also has an ETF tied to a nonprofit, though one its CEO doesn’t control. The Loncar Cancer Immunotherapy ETF (CNCR) is a concentrated portfolio (30 stocks) of biotech companies involved in developing drugs based on the body’s immune system to help fight cancer.
“Our ETF is dedicated to making an impact,” reads the text on the About Us section of the Loncar Funds website. It suggests that the firm may develop more ETFs focusing on immunotherapy treatment for other diseases.
Loncar Investments has pledged to donate 0.04% of the royalties it receives as the ETF's index provider to the Cancer Research Institute with a minimum contribution of $20,000 per year. Year to date, the $41 million CNCR has gained 21%.
Impact Shares operates as a nonprofit that develops and manages ETFs, using all of its advisory profits to help fund nonprofit organizations. It plans to create the “first-of-a-kind platform for clients seeking maximum social impact with market returns.”
It has a secured a $300,000 grant from The Rockefeller Foundation for the effort and is engaged with nonprofits working on minority rights, affordable housing, the arts and conservation, according to a press release issued in early August. It expects to launch its first ETF in late 2017.
“There remains a gap in ETF offerings that allow investors the opportunity to earn a market rate of return, while simultaneously creating what we call social alpha; that is, the knowledge that they are contributing in a significant way toward the issues they are passionate about,” explained Ethan Powell, founder and president of Impact Shares.
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