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Schwab to Launch First ESG, Active ETF

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What You Need to Know

  • The Schwab Ariel ESG ETF is semi-transparent and invests in small and mid-cap stocks screened for ESG factors.
  • In addition to Schwab's first ESG fund, the ETF is also its first actively managed ETF.
  • Ariel Investments, the fund's subadvisor, will choose holdings based on ESG factors and negative screens.

Schwab Asset Management is set to introduce its first fund focused on environmental, social and governance factors, joining a growing list of asset managers who sponsor ESG mutual funds and exchange traded funds. The ESG ETF also will be Schwab’s first actively managed ETF.

The Schwab Ariel ESG ETF (SAEF) is structured as a semi-transparent fund that invests in small- and mid-cap stocks screened for their ESG factors. Ariel Investments is its subadvisor, responsible for managing the portfolio on a daily basis.

The ETF is expected to start trading “on or about Nov. 16,” on the New York Stock Exchange, according to the Schwab press release. It has an operating expense ratio of 0.59%.

The Schwab Ariel ESG ETF will use the NYSE’s proxy portfolio structure, which allows the fund to limit the daily disclosure of its actual holdings and prevent any potential front-running. A proxy portfolio, which closely tracks the actual portfolio, will be published daily instead.

“Our first proprietary ESG fund addresses a clear gap in the market for a small- to mid-cap ESG fund managed through a value investing lens,” said Malik Sievers, head of ESG Strategy, Schwab Asset Management, in a statement.

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“We know that investing in line with one’s values is increasingly important to many investors,” said Rick Wurster, president of The Charles Schwab Corporation.

Ariel will use both a negative screening process and its proprietary ESG research to derive an ESG-risk rating for each holding, or prospective holding, in the fund.

Companies that have their primary source of revenue derived from the production or sale of tobacco products, the exploration for or the extraction of fossil fuels, the operation of private prisons or jails, and the manufacture of firearms, personal weapons, small arms, or controversial military weapons will be excluded from the ETF.

Schwab had announced plans for the Schwab Ariel ESG ETF in early April. It is the first collaboration between Schwab and Ariel on an an investment fund, but the firms have worked together for over 20 years on the Ariel-Schwab Black Investor Survey, which compares attitudes and behaviors about investing and saving among Black and white Americans.