Cathy Wood launches indexed transparency ETF
Cathy Wood is launching an index tracking ETF, which aims to invest in transparent global companies.
The ARK Transparency ETF (CTRU) will track the Transparency Index, which is provided by consultancy Transparency Invest.
The index ranks companies based on how transparent they are. This is measured using things like how long or short their terms and conditions pages are (i.e. lots of T&Cs and lots of fine print means a company is less transparent); how many law suits they’ve got going against them; how good their reputations are; and other things.
Companies are then put through an ESG screen. The ESG screen removes the usual bad guys in tobacco, alcohol, oil and gas, etc. but then goes further to remove metals and mining companies, banks, chemical businesses, and transportation companies.
The top 100 companies are chosen and equally weighted. The fund gets 90% of its weight from the US. It charges 0.55%.
Bernie’s commentary – ESG screen an excuse for a tech tilt
ESG ETFs have been criticised as just being technology and healthcare funds. There’s certainly some truth to this as they almost always overweight these two sectors. But in most instances, the sector tilts have been passed off as incidental.
The ESG screen CTRU uses also creates a software tilt in a big way. More than 41% of the fund’s weight comes from the tech sector. However in this instance, the ESG screen seems to be designed to manufacture a tech sector tilt. Just look at the choice of exclusions. You can pass off the exclusions of fossil fuels, tobacco, alcohol –that’s all standard. But excluding the banks? Metals? Chemicals? Transport? These exclusions rip the guts out of the materials, industrials and financial sectors. And these sectors have the lowest correlations with tech.
I’m also not too sure that transparency is a source of alpha. It is difficult to measure and define transparency—is it the same thing as disclosure? And different countries have different disclosure regimes. The US famously has a regulatory regime that goes all-in on disclosure, while providing very limited consumer protections. Whereas Switzerland goes the other way – with very little disclosure (companies report once a year) and strong consumer protections. Centralising transparency seems pretty US-centric.
Still, I’m all for novel product building. And this fund is certainly that.