VOTE ETF: The First Passive Aggressive ESG ETF (Review)
The VOTE ETF is the first activist exchange-traded fund (ETF) that seeks to bring about transformational change at large U.S. companies. Read more to learn why it’s a great fund to buy now.
SustainFi July 12, 2021
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What is the VOTE ETF?
|Fund name||Engine No. 1 Transform 500 ETF|
|Assets under management||$128 million|
|Index||Morningstar US Large Cap Select Index|
|Number of holdings||510|
|Top 3 holdings||Apple, Microsoft, Amazon|
Data as of 7/09/2021
Engine No 1 Transform 500 ETF (VOTE) is the first environmental, social, and governance (ESG) engagement ETF. Rather than excluding companies that need to change, such as oil and gas companies, VOTE will work to bring about change through:
- Voting in favor of climate change and other ESG proposals
- Running activist campaigns
- Bringing other investors on board
Most ESG funds are “exclusionary”: they exclude problematic companies in controversial industries, such as tobacco and oil and gas, instead of driving change at these companies. Engine No 1’s VOTE ETF will take the opposite approach by buying shares in these companies and driving change from within.
Who is behind the VOTE ETF?
Activist hedge fund Engine No 1 launched the ETF in June 2021 with over $100 million in assets. In May 2021, Engine No 1 shot to prominence on the back of its success in winning a shareholder fight with oil giant Exxon Mobil (XOM). In spite of only owning 0.02% of Exxon’s stock, Engine No 1 convinced larger stock owners to appoint three new directors to Exxon’s board. New directors will work to advance a sustainability agenda.
Hedge funds like Engine No 1 are out of reach for most investors, but VOTE is a way for anyone to make an impact at some of the largest U.S. companies.
Engine No 1 was founded in late 2020 by Chris James, a hedge fund veteran who formerly ran Andor Capital Management and Partner Fund Management. The San Francisco-based fund started with about $250 million in assets. The ETF itself is run by Jennifer Grancio, a founder of BlackRock’s iShares business.
How does the VOTE ETF invest?
Unlike most ESG funds, VOTE does not exclude companies in controversial sectors like oil and gas or include renewable energy companies.
VOTE tracks the Morningstar U.S. Large Cap Index, investing in around 500 of the largest U.S. stocks. As a result, the ETF’s holdings are very similar to the diversified funds you probably already own.
The ETF is passive: it does not attempt to pick stocks but will instead try to generate better returns by driving change. You can call it a passive aggressive ETF.
What are the VOTE ETF’s holdings?
The ETF is diversified across sectors and mirrors the U.S. equity market. Its top ten investments resemble those of any large-cap U.S. stock ETF.
|Holdings||% of Portfolio|
|Alphabet Inc (Class A)||2.0%|
|Alphabet Inc (Class C)||1.9%|
|Berkshire Hathaway Inc||1.4%|
Data as of 7/09/2021
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What are the VOTE ETF’s environmental, social, and governance ratings?
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- Fossil Free Funds Rating: D (5.6% of the fund is invested in energy companies)
- MSCI Rating: BBB
- Sustainalytics Rating: 3 / 5
At the time of this writing, ESG ratings for the VOTE ETF were not yet available, but we’ve looked up the ratings for the BNY Mellon US Large Cap Core Equity ETF (BKLC), which tracks the same Morningstar index. The ratings should therefore be comparable.
The VOTE ETF invests in large U.S. companies, so traditional environmental, social, and governance ratings should resemble those of the U.S. stock market. The ETF seeks to generate performance and advance the ESG agenda through shareholder engagement, not by owning the “greenest” stocks and excluding companies that don’t pass ESG screens.
As a result, ESG ratings are not relevant.
The VOTE ETF and shareholder activism
The VOTE ETF will try to make a difference by voting in favor of the ESG and climate change agenda, running activist campaigns, and getting other investors on board.
By getting to appoint three of their nominee directors to Exxon’s Board earlier this year, Engine No. 1 has already shown that they can bring about change at a greater scale than any activist mutual fund has.
With just over $100 million in assets, VOTE is too small by itself to make a big difference. However, they’ve successfully lobbied large investors in the past. Engine No 1 held only 0.02% of Exxon’s stock, yet they convinced fund managers with real ownership (BlackRock, Vanguard, and State Street) to vote with them.
VOTE is, therefore, a bet on whether Engine No 1 can convince BlackRock and other big asset managers to vote along with them in the future. Most large asset managers, in particular BlackRock, are actively marketing their ESG agenda. So Engine No 1 may find it easier to get their attention than ever before.
Is the VOTE ETF expensive?
No. VOTE charges only 0.05% ($5 on a $10,000 investment annually.)
You could argue that VOTE should be cheap because it tracks a large-cap stock index (without actively managing the portfolio of stocks.) A competitor ETF that tracks the same index – BNY Mellon US Large Cap Core Equity ETF (BKLC) – was one of the first “free” ETFs, charging no fees. (Free ETFs don’t make money, but their managers launch them to get investors through the door and cross-sell other funds.)
However, BKLC is not an activist ETF and does not have any ESG agenda. We think that a 0.05% fee is justified because waging activist campaigns can be expensive. For example, Engine No 1 spent $12.5 million on their activist campaign against Exxon.
VOTE is much cheaper than any sustainable mutual fund that engages with management teams. Most mutual funds are actively managed but charge much higher fees than passive ETFs (1% is normal). ESG mutual fund managers, such as Parnassus, argue that higher fees are justified because they try to bring about change. For instance, Parnassus has participated in a campaign to get snack giant Mondelez to switch to sustainable packaging.
However, now we have VOTE ETF, whose manager will push for change at large corporates, and mutual fund fees look less appealing than before.
Overall, a 0.05% expense ratio is great for an activist ETF.
How will the VOTE ETF perform?
It has yet to be proven that VOTE can generate better returns than the market. In fact, it’s unlikely because VOTE ETF is a representation of the U.S. equity market. If VOTE’s activist campaigns are successful, other large-cap ETFs will also benefit.
You can technically replicate VOTE’s returns by buying the BNY Mellon US Large Cap Core Equity ETF (BKLC), which tracks the same index and will therefore also benefit from VOTE’s activism. BKLC is free, but we think that paying 0.05% ($5 a year for a $10,000 investment) is a very low price for supporting a good cause.
- VOTE ETF is a great choice if you want to help make a positive impact at large U.S. companies
- VOTE ETF is by far the cheapest ESG fund (and much, much cheaper than ESG mutual funds)
- It’s a great diversified ETF to own (you are investing in large-cap U.S. stocks). By owning VOTE, you are supporting ESG and climate causes while owning the market and paying very little. So it’s a win-win proposition for an ESG-minded investor
- However, VOTE is not a good choice if you are determined not to invest in fossil fuels. The ETF will own fossil fuel companies to help make an impact through its ownership. VOTE is also not a great choice if you like to invest in renewable energy stocks
🔔 Curious about other ESG ETFs? Learn more here.