Juneteenth is a good time for investors to take a look at companies that are taking real actions to fight for racial justice. One exchange-rated fund has bundled some of those stocks together—and it has weathered the coronavirus crisis better than the S&P 500.
The Impact Shares NAACP Minority Empowerment ETF (ticker: NACP) was launched in 2018, currently with $4.6 million of assets under management. The tiny ETF is the only one that explicitly addresses issues of racial inequality.
Backed by the National Association for the Advancement of Colored People, the ETF tracks a Minority Empowerment Index developed by Morningstar. The index highlights companies that stand out for their commitment to diversity and inclusion. Factors considered in the selection process include board diversity, discrimination policies, community development programs, as well as nondiscriminary supply-chain and contractor policies.
There has been a lot of interest in the financial community in ESG investing—strategies and products that favor companies that hold themselves to higher environmental, social and corporate governance standards. But most ESG funds focus on a range of issues, not just racial discrimination.
2020 has renewed the focus on race. The coronavirus pandemic has disproportionately affected people of color, while the killing of George Floyd by Minneapolis police once again highlighted systematic racism and triggered protests across the country.
For corporations, promoting diversity and inclusion isn’t only the right thing to do from a social perspective, but also leads to better business outcomes, wrote Karen Wallace, Morningstar’s director of investor education, in a Thursday post. Wallace noted that multiple research has shown that more diverse companies achieve superior financial results.
“The reason is pretty unequivocal: Different perspectives foster innovation and improve decision-making,” she wrote.
One proof: The Morningstar Minority Empowerment Index currently has more exposure to so-called wide-moat companies——those with sustainable competitive advantages that allow them to fend off rivals and maintain strong profits——and less exposure to no-moat companies, than the broad market.
Wallace highlighted 15 companies that have achieved particularly high scores in the Minority Empowerment Index, including Microsoft (MSFT), Citigroup (C), Coca-Cola (KO), Intel (INTC), NortonLifeLock (NLOK), Morgan Stanley (MS), General Electric (GE), S&P Global (SPGI), Nielsen Holdings (NLSN), Biogen (BIIB), International Paper (IP), Dell Technologies (DELL), Hewlett Packard Enterprise ( HP E), Bank of America (BAC), and HP (HPQ).
Six of the companies have wide-moat ratings from Morningstar, while another three have narrow-moat ratings. Coca-Cola, General Electric, S&P Global, Hewlett Packard Enterprise, and Bank of America stand out particularly in terms of board diversity, while other companies have demonstrated particular strength in other areas.
The Impact Shares NAACP Minority Empowerment ETF currently owns 174 stocks. The sectors where it has the most exposure are technology, consumer cyclicals, health care, financial, and communication services.
With highflying names such as Amazon.com (AMZN), Microsoft, and Apple (AAPL) in its top holdings, the fund is down 0.2% so far in 2020, beating the S&P 500’s nearly 3% loss. The ETF also largely matched the broader market’s performance in 2019, returning nearly 31%.