First Trust has launched an ETF in Europe that applies its ‘capital strength’ investment process to a global universe of companies screened by environmental, social, and governance criteria.
Rupert Haddon, Managing Director and Head of Sales at First Trust Global Portfolios.
The First Trust Global Capital Strength ESG Leaders UCITS ETF has listed on the London Stock Exchange in US dollars (CESG LN) and pound sterling (FCSG LN) and on Euronext Amsterdam in euros (FCSG NA).
The fund is actively managed according to a systematic rules-based investment process that follows the methodology underpinning First Trust’s proprietary Capital Strength Index.
It marks the issuer’s first foray into ESG investing in Europe.
Investment process
Portfolio constituents are selected from the stocks that make up the MSCI ACWI ESG Leaders Index, which itself is derived from the MSCI ACWI universe of large and mid-cap companies from 23 developed and 27 emerging market countries.
The ‘ESG Leaders’ index excludes companies in the regular MSCI ACWI that are embroiled in severe ESG-related controversies and/or are involved in alcohol, tobacco, gambling, nuclear power, and weapons, as well as those with the lowest MSCI ESG ratings that make up 50% of the market capitalization from each region and sector of the MSCI ACWI.
The securities in this ESG-screened universe are then screened by various fundamental and technical criteria to select profitable companies with robust financial strength and low price volatility.
First, firms with a three-month average daily dollar trading volume below $5 million are removed. The process then targets exposure to the quality factor by screening for firms with at least $1 billion in cash or short-term investments, a long-term debt-to-market-cap ratio below 30%, and a return-on-equity greater than 15%.
Qualifying securities are then ranked by combined short-term (three month) and long-term (one year) realized stock price volatility, and the 50 securities with the lowest combined volatility score are selected.
Constituents are equally weighted while limiting exposure to any sector, as defined by the Industry Classification Benchmark, to 30%. Additionally, the deviation between the weight of any country relative to its weight in the MSCI ACWI ESG Leaders Index will be constrained to 15 percentage points. If the country or sector limit is breached, the security with the highest volatility score from that country or sector is removed and replaced with the next eligible stock from a different country or sector.
The fund is rebalanced semi-annually, although a weekly active management review ensures that any constituent with an MSCI ESG rating that has fallen below “BB” (equivalent to lower-average) is immediately removed.
Blended philosophies
Rupert Haddon, Managing Director and Head of Sales at First Trust Global Portfolios, said: “We are seeing an increasing appetite from investment managers and their clients for investment solutions that marry robust financial performance through a socially responsible lens. We are thrilled to be launching The First Trust Global Capital Strength ESG Leaders UCITS ETF which blends two philosophies into one liquid, transparent, and cost-effective solution balancing high-quality names with responsible investing wrapped into a rules-based actively managed ETF.”
Haddon continued: “By selecting the best-performing ESG companies combined with the capital strength fundamental methodology, this new fund can provide investors with a sustainable competitive advantage and a superior long-term investment opportunity. This ETF also offers downside protection through a combination of its high-quality focus and by applying low volatility metrics while focusing on a portfolio of the highest-scoring ESG companies. We are delighted to be bringing this to market.”
The fund comes with an expense ratio of 0.75%.
It is the second capital strength ETF offered by First Trust in Europe. The other is the regular First Trust Capital Strength UCITS ETF (FTCS LN), a non-ESG-focused strategy that applies the capital strength approach to a universe of large, mid, and small-cap US equities. This fund comes with an expense ratio of 0.60% and houses $16m in assets. Its US-listed counterpart, the First Trust Capital Strength ETF (FTCS US), houses $7.2bn