Schwab Asset Management has launched a semi-transparent actively managed ETF providing value-focused exposure to mid and small-cap US equities while incorporating environmental, social, and governance (ESG) criteria.
John W. Rogers, Founder, co-CEO, and CIO at Ariel Investments.
The Schwab Ariel ESG ETF (SAEF US) has been listed on NYSE Arca and comes with an expense ratio of 0.59%.
The fund is sub-advised by Ariel Investments, a Chicago-based investment company specializing in the US small- and mid-cap segment.
Founder, co-CEO, and CIO John W. Rogers and Executive Vice President Kenneth Kuhrt act as co-portfolio managers.
The ETF selects its securities from a universe of stocks defined by constituents the Russell 2500 Index.
Ariel first utilizes a negative screening process to exclude companies deriving significant revenue from business activities linked to tobacco, fossil fuels, private prisons, civilian firearms, and controversial military weapons.
It also leverages proprietary research to derive an ESG rating for each security with companies considered to be insufficiently managing their ESG risks rendered ineligible for inclusion.
Security selection is driven by Ariel’s value-driven approach which aims to identify companies trading at attractive prices compared to intrinsic value and possessing certain favourable characteristics including high barriers to entry, sustainable competitive advantages, strong earnings growth, skilled management teams, and solid financials.
The fund utilizes the New York Stock Exchange’s semi-transparent active ETF structure known as AMS (Actively Managed Solution) which enables it to avoid having to disclose daily portfolio holdings while maintaining the tax efficiency, liquidity, and lower costs typically associated with an ETF.
The AMS model achieves 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 to the ETF’s actual holdings. The proxy portfolio reflects the economic exposures and risk characteristics of the ETF’s actual portfolio and closely replicates intraday performance, thus providing market makers with enough information to offer competitive bids and asks on the ETF while mitigating the risk of front-running.
Malik Sievers, Head of ESG Strategy at Schwab Asset Management, said: “Our first proprietary ESG fund addresses a clear gap in the market for a small- to mid-cap ESG fund managed through a value investing lens. We are excited to bring investors a new option for incorporating ESG into their portfolios and which may help them to tailor their exposure to ESG investing based on their goals and preferences.”
Ariel’s Rogers added: “We are delighted to bring our value-based, high conviction ESG approach to the market in this new ETF. ESG has influenced how Ariel invests and engages since our founding in 1983. We believe in a more rigorous and thoughtful approach to ESG investing that uses proprietary analysis to gain a nuanced view of ESG risk, instead of relying solely on third-party rating systems. As long-term investors, we are driven by dialogue, not dictates. As a firm, we consistently engage with portfolio management teams to address ESG issues deemed material to their financial health.”