Kansas City-based American Century Investments has unveiled two semi-transparent actively managed ETFs that follow socially responsible investment mandates.
The ETFs invest along socially responsible guidelines while shielding the managers’ intellectual property through an innovative semi-transparent ETF structure.
The American Century Sustainable Equity ETF (ESGA US) and American Century Mid Cap Growth Impact ETF (MID US) have listed on NYSE Arca and come with expense ratios of 0.39% and 0.45% respectively.
The funds are the first to utilize a new active ETF structure – the NYSE AMS (Actively Managed Solution) – created by the New York Stock Exchange.
Similar to other semi-transparent active ETF approaches, the NYSE AMS model enables managers to avoid having to disclose daily portfolio holdings while maintaining the tax efficiency, liquidity, and lower costs typically associated with regular ETFs.
It does this through the use of a proxy portfolio that is designed to closely track the ETF’s performance but has a different composition and weighting than the fund’s holdings.
The proxy portfolio reflects the economic exposures and risk characteristics of the ETF’s actual portfolio. It closely replicates the intraday performance of the ETF while mitigating the risk of front-running.
The NYSE has partnered with financial intelligence company Qontigo which has employed a proprietary version of its Axioma Portfolio Optimizer along with the Axioma Factor Risk Models to generate the proxy portfolios.
Sebastian Ceria, Chief Executive Officer of Qontigo, commented, “Our successful collaboration with the NYSE has produced a solution that enables the investment management community to expand into this new and highly attractive category of investment products. With actively managed ETFs, investment managers are able to preserve their proprietary knowledge and methodologies while benefiting from the liquidity and infrastructure offered by an exchange-traded product.”
The ETFs
The American Century Sustainable Equity ETF invests in US large-cap stocks and seeks to outperform the S&P 500 Index. The strategy assigns potential constituents with a multifactor score that includes value, growth, momentum, and ESG considerations. The portfolio managers then pick stocks with the highest multifactor scores from each sector. The process seeks to build a portfolio with sustainable competitive advantages, a stronger ESG profile than the S&P 500, and a better return without taking on significant additional risk.
The American Century Mid Cap Growth Impact ETF invests in US mid-cap stocks and seeks to outperform the Russell Midcap Growth Index. The strategy first focuses on companies that are aligned with UN Sustainable Development Goals. Once the selection list has been narrowed, the managers pick stocks of companies with signs of business improvement and relative strength including accelerating earnings, revenue growth, or increasing cash flows.
Ed Rosenberg, Head of ETFs at American Century Investments, said, “We believe these new ESG solutions offer investors the ‘best of both worlds’: the alpha potential of active management with the advantages of ETFs, including low costs, tax efficiency, and liquidity. This continues the next evolution of the ETF industry, and it expands opportunities for clients by enabling access to managers and strategies that had previously not been available, particularly in an ESG strategy.”
Jonathan Thomas, CEO at American Century Investments, added, “In many respects, American Century remains a natural destination for investors wanting to have a positive impact on society by including actively managed ESG ETF strategies in their portfolios. Our ESG solutions continue to grow, while our ownership model results in more than 40% of our annual profits in the form of dividends being directed to funding medical research.”
The new launches follow American Century’s April release of two semi-transparent actively managed ETFs that were the first to harness the ActiveShares model created by financial product developers Precidian Investments. The American Century Focused Large Cap Value ETF (FLV US) and American Century Focused Dynamic Growth ETF (FDG US) invest in high-conviction portfolios consisting of 30 to 50 US large-cap securities with growth or value characteristics.