New York-based IndexIQ has announced the launch of two new ETFs in partnership with Luxembourg-headquartered environmental, social, and governance (ESG) investment specialists Candriam.
Sal Bruno, Chief Investment Officer at IndexIQ.
The two funds – the IQ Candriam ESG US Equity ETF (IQSU US) and the IQ Candriam ESG International Equity ETF (IQSI US) – aim to deliver broad equity market exposures, consistent with responsible investment principles.
The funds come with fees of 9bps and 15bps, respectively, and have been listed on NYSE Arca.
The ETFs’ underlying indices, the IQ Candriam ESG US Equity Index and the IQ Candriam ESG International Equity Index, target large- and mid-cap companies in their respective geographic realms that satisfy ESG criteria developed by Candriam.
The indices, which are based on investment universes that constitute approximately 85% of the equity market capitalization in their target market (as represented by a Solactive index), follow the same ESG security selection process.
The first step in the process combines a sector-specific analysis and ranking of issuer-specific factors, including corporate governance, environmental impact, and labour practices, along with a macro analysis of a company’s exposure to global sustainability trends, including climate change, resource depletion, and health and wellness.
This sector-specific analysis evaluates companies within the same sector against each other, using criteria specific to the particular sector. The process seeks to maintain exposure to all industry sectors of the economy, except for certain excluded activities. Companies with an overall ranking in the top 70% of the investment universe within each industry sector based on this ESG selection process are included in the index unless a company is excluded as a result of the second step in the process.
The second step is an exclusionary screen based on any continued and significant non-compliance with the principles of the UN Global Compact as well as the exclusion of companies engaged in certain businesses beyond minimum thresholds. This includes companies that operate in countries with oppressive regimes, operate in adult content, alcohol, armament, gambling, nuclear, and tobacco sectors, or utilize animal testing or genetic modification in research and development.
Index constituents are weighted based on their float-adjusted market capitalization subject to an individual constituent cap of 10% and a sector constraint such that the weight in any given sector does not deviate from the universe (as represented by the relevant parent Solactove index) by more than +/- 5% at any rebalance date.
If a constituent has a weighting greater than 10%, the excess weight is distributed proportionately across all other components. To the extent a sector deviates by more than 5%, the weights of the constituents in the affected sector are adjusted pro-rata to meet the sector constraint. Constituents in all other sectors are then adjusted to account for the sector weight changes, making sure that no other sectors violate the sector constraint.
The indices are rebalanced quarterly.
Commenting on the launch, Sal Bruno, Chief Investment Officer at IndexIQ, said, “We are thrilled to incorporate Candriam’s ESG criteria in our US ETFs for the first time. Partnering with Candriam enables us to provide core ESG products that leverage their award-winning ESG research and data while offering broad market exposure, without forgoing any sectors, in a cost-effective and tax-sensitive way. We believe this diversification, as well as the competitive fee levels, will be valuable to our clients, allowing us to meet their return objectives while offering investment strategies that align with their values.”
David Czupryna, Head of ESG Client Portfolio Management at Candriam, added, “As US investors become increasingly interested in sustainable investing, high-quality ESG strategies with the potential to generate alpha are at a premium. We are excited to expand our existing partnership with IndexIQ with IQSU and IQSI”.
IndexIQ and Candriam are subsidiaries of New York Life Investments.