Invesco has introduced two new ETFs in the US providing exposure to ESG-adjusted versions of flagship Nasdaq indices.
The ETFs provide ESG-enhanced exposure to large or mid-cap growth companies listed on Nasdaq.
The newly launched Invesco ESG NASDAQ 100 ETF (QQMG US) and Invesco ESG NASDAQ Next Gen 100 ETF (QQJG US) have been listed on Nasdaq and come with expense ratios of 0.20%.
The new funds share the same starting universes as their non-ESG siblings, namely the $200 billion Invesco QQQ (QQQ US) and $1.2bn Invesco NASDAQ Next Gen 100 ETF (QQQJ US), but incorporate additional environmental, social and governance considerations.
The regular QQQ tracks the Nasdaq 100 Index which consists of 100 of the largest US and international non-financial companies by market capitalization listed on Nasdaq.
QQQJ, meanwhile, tracks the Nasdaq Next Generation 100 Index which comprises the largest 100 non-financial Nasdaq-listed companies outside of the Nasdaq 100.
The new ETFs track ESG versions of these indices, specifically the Nasdaq 100 ESG Index and Nasdaq Next Generation 100 ESG Index.
The indices filter their starting universes using business activity and controversy screens before re-weighting the remaining constituents in favour of those better managing their ESG risks.
The methodology first excludes violators of UN Global Compact principles, companies embroiled in severe ESG-related controversies, and firms deriving revenue from business activities linked to adult entertainment, alcohol, arctic oil and gas exploration, recreational cannabis, controversial weapons, gambling, military weapons, nuclear power, oil and gas, oil sands, riot control, shale energy, small arms, thermal coal, or tobacco.
The indices then harness the capabilities of ESG data analytics specialist Sustainalytics which assigns each remaining stock an ‘ESG Risk Rating’. The ESG Risk Rating reflects an organization’s unmanaged ESG risk and is composed of three components: corporate governance, financially material ESG issues (factors that could reasonably impact a company’s economic value), and idiosyncratic issues (black swan risks that could be detrimental to economic value). Companies with ESG Risk Ratings above 40 (considered severe) are removed.
Finally, the constituents that are remaining after these two processes are weighted using a combination of their market capitalization and an ESG score, which broadly reflects the inverse of that company’s ESG Risk Rating.
Due to the concentration of certain large-cap stocks in the Nasdaq 100, the Nasdaq 100 ESG Index also applies several constraints aimed at enhancing diversification. These include a weight cap of 14% on the largest constituent, an aggregate cap of 40% on the five largest companies, and an individual cap of 4.5% on any company outside of the top five. Reconstitution and rebalancing occur on a quarterly basis.
The methodology presently results in the exclusion of six stocks from the Nasdaq 100, namely Honeywell, Analog Devices, Exelon, American Electric Power, Xcel Energy, and Peloton.
Compared to the regular index, the Nasdaq 100 ESG Index has increased exposure to the technology sector (63.1% vs 48.4%) and reduced exposure to the consumer discretionary (16.1% vs 17.3%) and communication services (6.2% vs 19.3%) sectors. Notable positions include Microsoft (13.9%), Apple (13.1%), Alphabet (7.0%), Nvidia (5.3%), Amazon (3.7%), Adobe (3.0%), Paypal (2.7%), Cisco Systems (2.5%), and Facebook (2.4%).
The Nasdaq Next Generation 100 ESG Index, meanwhile, has removed ten stocks from its starting universe, namely Caesars Entertainment, DraftKings, Royalty Pharma, 10X Genomics, Alliant Energy, Penn National Gaming, Novocure, Wynn Resorts, Beyond Meat, and Vimeo.
The index is exhibiting reduced exposure to the technology (39.5% vs 42.8%), healthcare (12.8% vs 19.9%), and communication services (5.2% vs 14.7%) sectors, while stocks from the consumer discretionary (23.4% vs 14.7%) and industrials (15.8% vs 8.0%) sectors are playing a larger role. The index is diversified at the constituent level with the largest positions being Fortinet (3.5%), Zscaler (2.7%), and Zebra Technologies (2.7%).
(All data as of September month-end).
Anna Paglia, Global Head of ETFs & Indexed Strategies at Invesco, said: “Invesco has been fortunate to work in lockstep with Nasdaq for almost two decades, finding beneficial ways to offer investors all over the globe access to Nasdaq-listed companies. Today’s launch will mark our continued collaboration. We are confident that the new Invesco ESG NASDAQ 100 ETF and Invesco ESG NASDAQ NextGen 100 ETF will bridge innovation and ESG to offer every type of investor a unique way to help meet their desired investment outcomes.”
Lauren Dillard, Executive Vice President and Head of Investment Intelligence at Nasdaq, added: “The interest in integrating ESG considerations into investment portfolios is on the rise globally. We are pleased to work with Invesco to introduce a refined and ESG-friendly version of one of the world’s most preeminent benchmarks. The strength of the Nasdaq 100 Index underscores the innovation and transformative changes of the companies within their respective industries. Our partnership with Invesco continues to expand the suite of Nasdaq 100 and other Nasdaq index-based products to provide investors with optionality that can meet their preferences and help achieve investment goals.”