ETF Expert Corner

SSGA’s Matt Bartolini Spotlights SPDR Gender Diversity ETF, Environmental ETF Suite

July 11th, 2017 by ETF Store Staff

Matt Bartolini, Head of SPDR Americas Research at State Street Global Advisors, spotlights the SPDR SSGA Gender Diversity Index ETF (SHE), along with several other ESG-focused ETFs.



Transcript

You can listen to our interview with Matt Bartolini by using the above media player or enjoy a full transcription of the interview below.

Nate Geraci: Before break, we were discussing socially responsible investing, and in particular, this topic of gender equality and diversity in corporate board rooms. We're now very pleased to welcome to the program Matt Bartolini, Head of SPDR Americas Research at State Street Global Advisors. Of course, State Street is the third largest ETF provider in the country, and they offer one of the more popular socially responsible ETFs, the SPDR SSGA Gender Diversity ETF, which is what we'll be focusing on today. Matt is joining us via phone from Boston. Matt, a pleasure to have you on the program.

Matt Bartolini: Very happy to be here.

Nate Geraci: Matt, we're going to get into the Gender Diversity ETF, along with a couple of other ESG-focused ETFs, but to start here today, why has socially responsible investing been an area of emphasis for State Street?

Matt Bartolini: Well, I think one of the big things from our vantage point when it comes to investing is aligning your socially responsible goals throughout your financial capital commitments - and index investing is one way to do that, because they're both long term in nature. And because, as you were referring to earlier, where we have a large degree of assets under management, we can actually make an impact through our long-term shareholder lens, and in the meantime, provide exposures and management capabilities, not only for investors who want to manage those traditional passive, but also who want to actually take a different place in the market and have that be aligned with their social or environmental goals as well.

Nate Geraci: Let's talk specifically about the SPDR Gender Diversity ETF, ticker symbol SHE. Great ticker by the way. First, I'd love to hear more about the backstory on this ETF. I know the California State Teachers’ Retirement System was involved in this ETF coming to fruition, so tell us about that, and then if you could, walk us through how this ETF is constructed.

Matt Bartolini: Sure, so when we took a look at the opportunities in the marketplace on where the ESG asset class category was headed, where there was a real defined gap - I think there's been a lot of headway made on the first generation, or the ESG, on the E portion - but on social governance investing, that really hadn't gone mainstream, and obviously we had recognized some form of a gap within the gender recognition within boards. And so did CalSTRS. So we came together to provide people not only the ability to speak with their words, but also speak with their actions by allocating capital to the companies that offer or have some of the most diverse C-suites within the entire US equity markets. So we paired up with CalSTRS and launched the product, as well as kicking off our really broader, firm-wide campaign on pushing for change and pushing for outcomes within the gender diversity landscape, and really trying to push and move the needle.

Nate Geraci: So Matt, if we look at SHE, give us an idea, how many holdings are in this ETF and what are some of the specific criteria used to determine those holdings?

Matt Bartolini: Right now, it has about 185 securities, and that sort of makes sense when you go back to the statistics you were referring to earlier where there's really not a lot of companies that have a large proportion, or a noticeable proportion, of women within senior leadership roles. So it's 185 stocks, and when we sought to construct the index, because it's also an SSGA managed index, we took that in-house and we really wanted to apply a very granular lens to the gender diversity issue, but also be able to provide investors with something that they could use in the core of their portfolios. When we look at sort of other ESG or smart beta strategies, they might be skewed or tilted towards one specific sector, and that gives you a lot of concentration risk. So what we wanted to do was provide a vehicle that can be used in the core, is diverse across economic sectors, but skewed toward the companies that represent a strong footing within gender diversity. So just very briefly, the way the portfolio is constructed is that it will rank companies within their respective sector, and then they will be then included within the index. So it takes a sector viewpoint first, then allocates into the broad marketplace.

Nate Geraci: And to be clear, it's entirely US stocks, correct?

Matt Bartolini: That's correct, that's correct.

Jason Lank: Matt, this is Jason Lank. Welcome to the show. As you construct the index, where do you find the data for this? I would think that companies falling short in this area aren't excited about handing over the data to you. Is this publicly available? Do you have to do some investigational digging? How does that come about?

Matt Bartolini: So a lot of the data points, they can be publicly disseminated through shareholder reports. But we would contract and source a lot of the data from data vendors that specialize in board management reporting, as well as staffing reporting. And there’s a definable cost associated with that, and that's not a lot of information that, while public, it's not very publicly known. And I think by taking that data and putting it into an index, a very transparent ETF as well, where you can see the holdings on a daily basis, it actually takes that data and makes it very loud, which I think is really powerful in this whole entire movement of pushing for change within gender diversity.

Nate Geraci: Our guest today is Matt Bartolini, Head of SPDR Americas Research at State Street Global Advisors. Matt, you were touching on the sector diversification and also the constraints within this ETF. I'm curious, are there certain sectors of the economy that seem to have better track records in terms of gender diversity? For example, are there sectors that really seem to be ahead of the curve with gender diversity, and then are there some sectors that perhaps are still a bit in the dark ages?

Matt Bartolini: Like I said earlier, the ETF is pretty diverse across its sector exposures. We're going to rank first within the sector based on board composition. So we try to be somewhat constrained from that perspective. With that said, we're not always going to be allocated to the segment of the market that has the most diverse companies, and that's a byproduct of being able to want to provide a core type exposure that is diversified. But there are certain areas of the market like healthcare firms. Healthcare firms actually have a decent amount, above average, of gender diversity across their board structures. Same thing with certain consumer discretionary staple companies, specifically with respect to the retail industry. So there are some segments of the market that are much higher than what you would say the average is within the US equity markets.

Jason Lank: Matt, as this area of investing continues to grow, just from a high level, how far can or should activism go? It's one thing to vote for or against corporate issues based on a company's performance from gender diversity. Is that enough? In the future, could we see press releases about companies that are doing well or not well in this area? Twitter's becoming important. Will we see releases there? Where is activism going in the future?

Matt Bartolini: When I think specifically with respect to SHE and gender diversity, where we have a large asset base, and we can vote with our beliefs as a firm, and impact change within other firms, I think that's really powerful. And what I would say is where it might be headed is, for instance, where companies that are not included within the gender diversity index, and they want to be known for having a diverse governance board, or a diverse management structure, where they are actively making changes in the way they structure their senior level management so they can be included in the index. I think that will be sort of the next leg of this activism by index providers and index managers, where companies are really changing the way they do business in accordance with the viewpoints that we've set forth, specifically with gender diversity.

Nate Geraci: Matt, before we move on here as it relates to the Gender Diversity ETF, just to be clear, investors can think of this ETF as a core holding within a diversified portfolio, is that correct?

Matt Bartolini: Yeah. I mean, when we look at it, it's US equities. It's about 200 securities. Now, that's obviously not going to be a broad, encompassing marketplace when you look at other exposures that go up to three thousand, four thousand securities. However, by structuring it at the sector level first, you have a decent amount of comfort knowing that your diversification is there from a sector positioning standpoint. So if you have a portfolio where you're trying to make it more impact-oriented for ESG, then you could feel somewhat comfortable in using SHE as a replacement for traditional US equity market structures. And this is the same for when we talk about our environmental suite as well. Structuring these indexes and these portfolios with the ability to be used as a replacement I think is really powerful.

Nate Geraci: We're visiting with Matt Bartolini, Head of SPDR Americas Research at State Street Global Advisors. Matt, besides the Gender Diversity ETF, as you mentioned, State Street does have an environmental suite of ETFs, and I do want to highlight a couple of these. The first is the SPDR S&P 500 Fossil Fuel Reserves Free ETF, ticker symbol SPYX. This happens to be one of the most popular ESG-focused ETFs currently available. Tell us more about this ETF, and for listeners who aren't familiar, what are fossil fuel reserves?

Matt Bartolini: So it's basically combustible fuels, oils, that are held in reserve by large scale energy and coal companies, and they're largely held beneath the surface. So they're somewhat untappable at the moment, or they might have been extracted at a higher price point, and it may no longer be economically viable to use because there could be a loss associated with that mechanism. So it's basically oil beneath the ground.

Nate Geraci: Okay, and so as we look at SPYX, tell us a little bit about it. How is it constructed? What are some of the holdings?

Matt Bartolini: So what SPYX does is it looks at, again, the data to figure out where companies have these excess fossil fuel reserves. And what we do is we do not allocate to them. So it's a very much a divestment strategy where we are not going to hold the companies with fossil fuel reserves. So when we look at the composition of the index and the ETF, you actually have a very noticeable underweight to energy firms naturally, and to some extent, some materials firms as well. But we don't naturally just cut out every single energy firm that obviously do not have reserves beneath the surface, but they may interact with them, so some oil field services companies. But what we're trying to do is mitigate the risk, the carbon risk, associated with having a large scale amount of excess fossil fuel reserves within and basically placed on your balance sheet. So what investors can think about is as basically an S&P 500 index excluding the fossil fuel reserve companies.

Nate Geraci: Now, there are also developed international and emerging market versions of this strategy as well, is that correct?

Matt Bartolini: That's correct. And a lot of that has to do with the academic studies and our belief that asset allocation is really important to driving return to managing risk. So by offering a flagship S&P 500 fossil fuel reserves, a flagship EAFE and EM fossil fuel reserves, we can provide investors the tools to construct portfolios that match their environmental goals, all the while being able to harness the powerful effects of portfolio construction and asset allocation.

Nate Geraci: One other ETF focused in this area that State Street offers is the SPDR MSCI ACWI Low Carbon Target ETF, ticker symbol LOWC. I'm curious, what's the difference between that ETF and then the exposure offered by the fossil fuel reserves free ETFs?

Matt Bartolini: Yeah, there's basically two structures that you could look at from a ESG standpoint. One is the divestment. So very targeted, you just cut out the area of the market that you do not want. And that's what SPYX, EFAX and EEMX is. They are tiered divestment. You know specifically that you're not going to allocate to those firms. What LOWC does is it takes a global approach. So it's based off of the ACWI exposure, so All Country World Index. And what it does is it looks at the carbon footprint of every single company, irrespective of if they’re in the energy, materials, or consumer discretionary market. What is their carbon footprint? And then after it looks at that, it will reallocate based on companies that have the least amount of carbon exposure and give them the highest weight. But knowing that investors need to allocate capital for today, tomorrow, and the future to meet financial goals, we need to ensure that the benchmark exposure provided closely mirrors the traditional index. So what is applied later on is through an optimization process, we try to constrain for predicted tracking error of 30 basis points. So what the end result is, you get a global portfolio with a lower carbon footprint than traditional passive, all the while maintaining a tight tracking ability to that traditional passive option. So another really strong core position they can use to meet financial, as well as potentially meet your environmental goals.

Nate Geraci: Matt, lastly, before we let you go here, as ESG investing grows in popularity, I still think one aspect that investors struggle to get their hands around is the fact that very few companies are going to do everything right. There might be a company with an excellent track record on gender diversity, but maybe they have a horrific environmental track record. So how should investors think about ESG investing? Because there are some limitations here. It's not an all or nothing approach.

Matt Bartolini: That's correct. I mean, like you said, there's going to be companies that have great gender diversity but score very poorly from an environmental perspective, and how do you reconcile that? So one of the things that we talk about is really recognizing that ESG is not one size fits all. There's a couple different things you need to really focus in on. One is does the strategy align with your social goals? So for instance, do you not want to own anyone that owns or has exposure to fossil fuel reserves? So SPYX would probably fit in that bucket. But do you want to maintain a tight tracking error to your benchmark to meet your financial goals? So you'd have to investigate that. You have to do the due diligence to ensure that that strategy would be able to meet your financial goals. So I think it really just comes down to due diligence and being comfortable with the social aspect, the environmental aspect, as well as how it fits into a portfolio and how it actually be able to provide you long-term capital appreciation, growth, or income.

Nate Geraci: Well, Matt, with that, we'll have to leave it there. Excellent discussion today. We certainly appreciate you taking the time to join us on the program. Thank you very much.

Matt Bartolini: Thank you. My pleasure.

Nate Geraci: That was Matt Bartolini, Head of SPDR Americas Research at State Street Global Advisors, and if you would like to learn more about State Street's ESG ETFs, or any of the SPDR ETFs, you can do so by visiting SPDRS.com.