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Portfolio > Portfolio Construction > ESG

Engine No. 1 Introduces a New Kind of Purpose-Driven ETF

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What You Need to Know

  • VOTE will use proxy voting, corporate engagement and shareholder proposals in order to have an impact on corporate policies.
  • It is an activist large-cap index ETF, which is unusual for passive funds.
  • Engine No. 1 used an activist approach to successfully replace three members of ExxonMobil's board this spring.

Engine No. 1, the novice purpose-driven investment firm that took on ExxonMobil and won, has entered the ETF market, launching a new large-cap stock index ETF that will focus on proxy voting, corporate engagement and shareholder proposals in order to impact corporate policies.

The Engine No. 1 Transform 500 ETF (VOTE) trades on the Cboe, tracks the Morningstar Large Cap Select Index and has a net expense ratio of 0.05%. It debuted Wednesday with $100 million from institutional investors and announcement that it will be integrated into Betterment’s platforms for retail investors, advisors and 401(k) plans.

“Too many sustainable investing strategies shift an investor’s exposure away from companies that need to change rather than working to change them,” said Engine No. 1 Managing Director Michael O’Leary in a statement. “We see an opportunity to harness the power of investors in a new way.”

What’s new about the ETF is that its purpose is to be an activist investor that helps effect corporate policies, which is unusual for index funds.

“The problem isn’t passive investing. “It’s passive ownership,” said O’Leary.

A New Kind of Socially Responsible Index Fund

Engine No. 1 showed that activism when it sponsored a slate of four nominees to Exxon’s board of directors at its shareholder meeting in late May to drive a stronger response to climate change. Three of the four nominees won. BlackRock voted for three of them and Vanguard and State Street each voted for two, illustrating the power of index fund managers.

“Because our purpose is to do only this, we can lead in ways that others struggle to do and hope to bring other [large investors] along as well,” O’Leary told ThinkAdvisor. He noted that only 20 of 186 social and environmental shareholder proposals in 2020 passed. “This is an opportunity to engage clients without changing their underlying exposure.”

O’Leary told ThinkAdvisor that the new ETF will select several companies where it sees opportunities for change, to make progress on their approach on climate issues, including commitments to net zero emissions, and social issues such as investments in their workers.

“VOTE can disrupt the idea of what it means to be an index fund, while retaining its most appealing feature — low cost,” said Boris Khentov, senior vice president of operations at Betterment. … We are excited to integrate this groundbreaking ETF into our SRI (socially responsible investing) strategies.”

Those strategies have grown to $1 billion in assets since their late October 2020 debut. They “continue to grow faster than our core offerings,” said Khentov. “They are still a fraction of our $30 billion AUM, but the momentum is there.”

Khentov expects that momentum will include a desire by investors for more shareholder engagement on SRI issues. Betterment “will be observing VOTE for some time to ensure adequate liquidity” and expects to integrate VOTE into its SRI portfolios throughout the summer, starting in July, Khentov said.

Engine No. 1 has plans to launch another activist socially responsible ETF later this year. The Transform Climate ETF will invest in companies that are transforming themselves to address the growing demands of climate change or that are helping other companies to do so.

“We’re building our ETF business for the long-term and for scale,” said Yasmin Dahya Bilger, head of ETFs at Engine No. 1.


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