We live in the golden age of exchange-traded funds. It has never been easier — or cheaper — to buy an index or an investing theme. The good news is investors have an enormous set of investment choices; the bad news is some of these seem to be designed to appeal emotionally, not rationally or logically. And irrational investors are never good investors.
CWM Advisors LLC recently filed a prospectus with the Securities and Exchange Commission, according to ETF.com, creating a biblically responsible ETF. Here’s how the firm described it at its Inspire Investing site:
We believe good returns and good values are not mutually exclusive. Inspire Global Hope Large Cap ETF is designed to create meaningful impact by investing in some of the most inspiring companies from around the globe, while also seeking to provide investors with a low cost, high impact investment that meets the stringent demands of modern investors.
If that language seems at all familiar, it is likely because biblically responsible investing, or BRI, is similar to ESG, one of the hottest trends in investing. ESG investing encourages companies to embrace E (environmental), S (social) and G (governance) policies to achieve corporate goals.
The appeals of this approach are myriad. A “green” environmental approach can be associated with reduced risk; consider recent environmental disasters such as BP’s Deepwater Horizon or the reorganization of coal stocks. Good governance works well as a corporate screen, with the potential advantage of better performance. Companies with a strong commitment to good governance — i.e. board structure and diversity, executive compensation, ethics and risk management — are associated with better performance. (There is a question here of whether it’s a causative factor or merely correlated, but let’s save that for another column.)
My assumption is that BRI hopes to check off a few similar boxes as ESG while appealing to a very specific investor demographic.
Santa Clara University professor Meir Statman, author of “What Investors Really Want,” says many investors are looking for “expressive benefits” when deploying capital — they want their money to also reflect their values, desires and belief systems. It is as good an explanation as any for bringing in other non-investment-related goals as part of their questionable decision making. As you might surmise, I am unenthusiastic about any investment approach that relies on emotional appeals.
The controversy around this ETF comes from its methodology. The companies it will not invest in do not reflect “biblical values” (anti-abortion, -gambling, -alcohol, -pornography). Where it goes a step further than the usual so-called virtue stocks is its stance on what it called “the LGBT lifestyle.” The Financial Times has already termed this the “anti-gay ETF.”
The problem is how many companies have already adapted to Obergefell v. Hodges, the landmark U.S. Supreme Court case that found same-sex couples were guaranteed the fundamental right to marry. Changes in companies’ policies have been swift: “Ninety-two percent of the Fortune 500 companies now include ‘sexual orientation’ in their nondiscrimination policies and 82 percent include ‘gender identity,’” according to the New York Times. Indeed, more than half of Fortune 500 companies now offer “transgender-inclusive health care benefits, including for surgical procedures.”
Eliminating that many potential investments for reasons that have precisely zero to do with valuation, potential risks or future returns sets quite a high hurdle. Virtue investing — omitting “vice” stocks — typically removes a small percentage of names from consideration. The Inspire corporate LGBT lifestyle screen is of an entirely different magnitude.
Experience teaches us that any and all ideologies are problematic for investors. Data matters, and historical performance can be a helpful guide; ignoring these is never a great strategy for deploying risk capital.
The markets will eventually sort these things out. Perhaps the BRI style of investing will capture a new factor we were unaware of previously. Perhaps it can even outperform the broader index or ESG portfolios. If so, it will attract lots of capital, regardless of the ethical issues of inequality involved. That just seems to be the nature of capitalism.
However, I have doubts that it can. The recent history of ESG investing and all the available data suggest it offers benefits that are likely to be missing from BRI. Exactly why more inclusive corporate management teams are associated with better market performance is still up for debate, but it seems to be a relevant source of lowered risk and competitive performance. The less tolerant approach is fighting an uphill battle in terms of matching that performance.
I have exhorted the politically minded to separate their politics from their portfolios. Until the data suggests otherwise, those with a strong religious affiliation are similarly advised to confine their spirituality to their houses of worship.
Portfolios are no place for prayer. Amen.
See these additional postings by Mr. Ritholtz: