How To Invest in Racial and Gender Equality
Is there a way to invest in baskets of stocks that support gender or racial equality? Several funds claiming to promote diversity launched recently, but which of them do what they claim? Read to find out.
SustainFi June 2, 2021
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Several funds that target gender and racial diversity launched over the past five years. Some of these funds can be a way to invest your values, but others are less promising.
Investing in women’s leadership
The COVID pandemic impacted women more than men. Many women had to take on more childcare responsibilities, reduce their work hours or drop out of the workforce entirely. So investing in companies that integrate women well should be a priority if you want to invest your values.
We have reviewed two exchange-traded funds (ETFs), SHE and WOMN, and two mutual funds, Pax Ellevate Global Women’s Leadership Fund (PXWEX) and Fidelity Women’s Leadership Fund (FWOMX), that claim to invest in women leadership. These funds typically select stocks based on the proportion of women in top management and director ranks. Pax Ellevate’s manager, Pax World Funds, has also been engaging with companies on gender diversity issues.
Investing in racial justice
In the aftermath of George Floyd’s death, racial justice investing has also gained ground. Launched in 2018, the Impact Shares NAACP Minority Empowerment ETF (NACP) is the only racial justice ETF.
💰 Our Pick
- If you are looking for a cheap, diversified option, we like the SPDR SSGA Gender Diversity Index ETF (SHE) ETF. The fund’s concept is well executed, its expense ratio is relatively low (0.20%), and its top holdings differ from what we typically see in a broad market sustainable ETF
- If you want a fund that actively engages with companies on diversity issues, we suggest Pax Ellevate Global Women’s Leadership Fund (PXWEX). However, you end up paying more for engagement (0.78% annually)
|Fund||Ticker||Expense Ratio||Assets ($m)||Inception Date||Fossil Free Funds Rating||MSCI Rating||Sustainalytics Rating|
|Pax Ellevate Global Women's Leadership Fund||PXWEX||0.78%||871||1993||B||A||4 / 5|
|SPDR SSGA Gender Diversity Index ETF||SHE||0.20%||234||2016||C||AA||4 / 5|
|Fidelity Women’s Leadership Fund||FWOMX||1.00%||121||2019||B||A||5 / 5|
|Impact Shares NAACP Minority Empowerment ETF||NACP||0.49%||29||2018||C||BBB||4 / 5|
|Impact Shares YWCA Women's Empowerment ETF||WOMN||0.75%||26||2018||B||BBB||4 / 5|
Data as of 6/1/2021
Pax Ellevate Global Women’s Leadership Fund (PXWEX)
· Assets under management: $871 million
· Expense ratio: 0.78%
Pax Ellevate (PXWEX) is the U.S.’s largest and oldest gender equality mutual fund. Launched in 1993 by ESG boutique Pax World, the fund invests in companies that advance women through gender-diverse boards and senior leadership teams. The fund was developed in partnership with Sallie Krawcheck. She is a Wall Street veteran who now runs Ellevest, a robo-advisor focusing on women’s investment needs. (Read the review here.)
Pax World selects stocks from MSCI World, a global stock index. To be included, companies need to have an above-average number of women in top management and on the Board. Pax World also screens out oil and gas, weapon, and tobacco companies.
The fund holds more than 400 global stocks, including Microsoft, Amazon, and cosmetics company Estee Lauder as its top holdings. As of May 2021, two-thirds of the portfolio was allocated to U.S. stocks. The rest was in international – mostly European – stocks.
The fund manager, Pax World, has always focused on socially responsible investing. Its shareholder voting record on gender equality issues supports that. Pax World actually files pro-diversity shareholder resolutions, including gender-pay equity at Oracle and Mastercard.
The fund’s performance has been in line with the MSCI World index, which tracks global stocks. However, the 0.78% management fee is expensive.
SPDR SSGA Gender Diversity Index ETF (SHE)
· Assets under management: $234 million
· Expense ratio: 0.20%
Launched in 2016, SHE invests in large-cap U.S. companies with a high percentage of women who are executives or directors. State Street famously advertised this fund by commissioning the Fearless Girl statue in the Financial District of Manhattan.
The fund picks stocks from the top 1,000 US companies and weighs them based on market cap. Companies in the top 10% on gender equality metrics in each sector are included. Each stock is capped at 5% of the fund.
SHE has 165 holdings, with around 27% of the fund invested in tech. The top three holdings are PayPal, semiconductor company Texas Instruments, and Visa.
SHE is relatively inexpensive, with only a 0.20% expense ratio.
The caveat is that the fund’s manager, State Street, has not always voted in favor of pro-gender equality shareholder resolutions. Morningstar pointed out that, between 2016 and 2018, State Street voted in favor of only 19% gender-equality resolutions.
However, large asset managers, including State Street, are increasingly supporting environmental, social, and governance (ESG) shareholder resolutions. We hope that this will extend to diversity resolutions going forward.
Fidelity Women’s Leadership Fund (FWOMX)
· Assets under management: $121 million
· Expense ratio: 1.0%
Launched by Fidelity in 2019, Fidelity Women’s Leadership Fund (FWOMX) is an actively managed mutual fund that invests in large and mid-cap U.S. stocks. The fund is managed by a woman, Nicole A. Connolly. She previously invested in natural resources, utilities, technology, and emerging markets.
To be included in the fund, companies must have:
- Women in the key roles in senior leadership, or
- At least one-third of the Board held by women, or
- Policies aimed at attracting, retaining and promoting women (such as parental leave)
The fund has around 130 holdings, including Microsoft, Disney, Accenture, Anthem, and Salesforce.
Although the fund has beaten its benchmark, the Russell 3000, since inception, it’s very expensive at 1.0%.
Impact Shares NAACP Minority Empowerment ETF (NACP)
· Assets under management: $29 million
· Expense ratio: 0.49%
NACP is the first and only ETF to promote racial equality. It’s a small fund investing in large and mid-cap U.S. stocks. It is also the first fund launched by Impact Shares, a provider of socially conscious ETFs.
The stocks in the fund are selected using the NAACP‘s scoring criteria. These criteria include board diversity, anti-discrimination policies, community engagement, and diversity programs. The fund maximizes exposure to the highest-scoring companies while mimicking the risk-return characteristics of the broad market.
The fund owns around 190 stocks, including a lot of tech (34% of assets). Top investments are Microsoft, Apple, and Facebook, similar to large sustainable ETFs. In fact, returns don’t look very different from much cheaper broad market ESG ETFs like SUSL. The NAACP admitted that the largest companies like Apple report the most data on racial diversity, and so they are more likely to be included.
The fund is also quite expensive (0.49% or $49 annually on a $10,000 investment), and it has a “medium” closure risk, according to FactSet.
We wonder if there is a better way of investing in racial justice. For example, you could lend to community development financial institutions (CDFIs). CDFIs lend to underserved communities, including people of color.
Impact Shares YWCA Women’s Empowerment ETF (WOMN)
· Assets under management: $26 million
· Expense ratio: 0.75%
Launched in 2018, WOMN tracks an index of large and mid-cap U.S. stocks that score high on gender diversity. To come up with the scores, the WOMN’s index gives each company a rating for gender balance in leadership and workforce, equal compensation and work-life balance, and policies promoting gender equality.
The algorithm then selects about 200 stocks with the highest scores while maintaining a market-like risk and return. Companies involved in ethical controversies and industries like weapons, gambling, and tobacco are excluded.
We think that the fund’s fee is too high and it’s too small to be a good investment. Although the fund is passively managed, it charges a fee that’s similar to an actively managed mutual fund. Further, the fund has few assets under management. Data provider FactSet rates the fund’s closure risk as “medium.” You don’t lose your money if a fund closes, but it can be an administrative and tax nuisance.
Investing with a purpose has never been easier. We would consider adding SPDR SSGA Gender Diversity Index ETF (SHE) to your portfolio. However, we do not recommend allocating more than 5-10% of your equity holdings to social impact ETFs (or other thematic ETFs).
🔔 Learn how to invest in other ETFs that make a positive change in society. Read our guide to environmental, social, and governance ETFs.