Constrained Capital, an investment firm set up to capitalize on market distortions created by capital constraints, has launched its debut ETF, an index fund targeting companies commonly excluded by ESG-focused portfolios.
ESG Orphans includes companies with operations linked to fossil fuel energy, nuclear power, tobacco, weapons, alcohol, and gambling.
The Constrained Capital ESG Orphans ETF (ORFN US) has been listed on NYSE Arca, coming to market in partnership with white-label ETF issuer Tidal ETF Services.
Constrained Capital believes that a bubble has formed around ESG investing which, over the past decade, has distorted prices in entire sectors that were excluded (or orphaned) from socially responsible portfolios.
The firm notes that widespread investment constraints imposed upon ‘ESG orphan’ securities have created the potential for higher expected returns over time.
Additionally, ESG orphans also typically exhibit above-market dividend yields, defensive characteristics, and relatively lower correlations to broader equity indices, helping to diversify and fortify investor portfolios.
Mark Neuman, Founder and CIO of Constrained Capital, commented: “The explosion in the ESG investing movement over the past decade has yielded what I believe to be a generational opportunity in a contrarian, reversion theme for opportunistically inclined, critical thinking investors. The strategy is designed for all types of investors looking for a timely and alternative portfolio allocation.”
Gavin Filmore, Head of Product at Tidal ETF Services, added: “We’re honored to work with a best-in-class partner like Constrained Capital who saw a unique opportunity to bring to market a product which is contrarian in nature. As a platform for innovative ETFs, we pride ourselves in partnering with issuers and index providers who view markets from a unique vantage point; Constrained Capital is a great example of just that.”
Methodology
The fund is linked to the ESG Orphans Index which was developed by Constrained Capital and is independently calculated and maintained by Solactive.
The index selects its constituents from a universe of US-listed equities including American Depository Receipts of large and mid-cap companies with average daily trading volumes greater than $5 million.
The index utilizes FactSet’s Revere Business Industry Classification System (RBICS) to screen for companies operating within six ESG orphan categories: fossil fuel energy, nuclear power, tobacco, weapons, alcohol, and gambling.
The index selects the 50 largest eligible companies while limiting the number of constituents chosen from any one category to 12.
Constituents are weighted by float-adjusted market capitalization while capping single stock positions at 10%, category weights at 25%, and the cumulative weight of companies accounting for more than 5% at 50%. The index is reconstituted and rebalanced on a semi-annual basis.
As of the end of May, US-domiciled firms made up approximately 90% of the index’s exposure with the remaining weight in British and Belgian companies.
Firms from the nuclear power and fossil fuel energy categories each accounted for a quarter of the index’s total weight followed by gambling stocks at 22%, alcohol and tobacco stocks at 12% each, and weapons manufacturers at 4%.
Notable positions included Exxon (8.0%), Chevron (6.9%), Philip Morris (6.6%), Raytheon Technologies (5.5%), Nextera Energy (4.8%), Lockheed Martin (4.7%), Diageo (4.2%), Altria (3.9%), Anheuser Busch (3.9%), and British American Tobacco (3.9%).
The ETF comes with an expense ratio of 0.75%.