When the unique VEGN ticker hit the New York Stock Exchange in September 2019, it caught the attention of both financial commentators and investors. The US Vegan Climate exchange-traded fund had the goal of becoming a sustainable alternative to the S&P 500 that was both cruelty-free and climate-conscious.
Many analysts and investors speculated about the kind of performance a large-cap passive-fund could deliver when it was barred from holding any stocks with exposure to animal testing, or animal-derived products, fossil fuels, or any company with links to defense, or evidence of human rights abuses in their supply chain.
This would have immediately ruled out a lot of commonly-held names in the energy, fashion, pharmaceutical, and other consumer sectors.
But a year on, the Vegan ETF is beating its S&P 500 benchmark and founder Claire Smith’s 34 years of experience in the financial services industry are paying off. The ETF has returned 27.69% on market price against the S&P 500 Index’s 19.75% through to 31st August 2020.
“I think that they were concerned initially that the product would be very high beta and so it would be significantly more volatile than the market,” Smith, who is CEO of Beyond Investing, said.
In her previous roles, Smith, who is vegan herself, was becoming increasingly uncomfortable about advocating for investments that made the managers profits at what she believed was an incredible cost to the environment. And she spotted a gap in the market for a fund that screened for animal cruelty.
“I guess over time, I realized that my involvement in that space created something of a dilemma, because I was placed into a situation where, on traditional financial grounds, I should recommend this manager for doing something, which from the perspective of the environment, (and) my own personal convictions, was anathema,” Smith said.
Screening for winners
The fund’s selection criteria are strict. It takes all the companies in Solactive US Large Cap index, a proxy index for the S&P 500, and removes any that engage in animal testing, play a role in animal-derived products, finance fossil fuels and other environmentally harmful acitivies. The fund also strips out companies that produce energy from fossil fuels, or that have any involvement in defense activities, or that have been linked to human rights problems.
Around 49% of the top 500 US large cap stocks aren’t eligible for inclusion, leaving around 280 names, all of which must be continuously scrutinized for their sustainability practices, ready for when the fund rebalances every six months.
Many of the companies removed are from sectors that struggled during the worst of the pandemic. Smith is underweight in airlines, cruise lines, hotels, energy, clothing chains, some supermarkets and any companies involved in animal-derived products.
The fund does hold plant-based food producers such as Beyond Meat and vegan-friendly additives manufacturer Ingredion, but its largest holdings are not in the food and beverage sector. Many vegan-friendly companies are simply not large enough, at least not yet, to qualify for inclusion.
With such tough rules in place, many of Smith’s biggest holdings are some of the companies that have done well out of the pandemic, particularly technology stocks, which make up 37% of the fund, according to Morningstar.
The VEGN ETF’s top 10 holdings from Beyond Investing’s website
Technology stocks, generally, are less likely to be linked to some of the barriers that prevent some of the pure consumer, or natural resources stocks from being included in the VEGN fund.
“Technology is behind most of the advances in our society,” Smith said. “And so to be overweight technologies, probably a fairly comfortable place to be at this moment in time because of the changes which are happening in our society, and the way that technology is basically underlying those changes and enabling those changes to come about.”
But some holdings will still raise eyebrows among a few ethically conscious investors.
Uber, the ride-sharing company that has been widely criticized for creating congestion in cities like Chicago, London and New York, remains in the portfolio.
With many of these companies, it’s a balancing act, Smith said.
In the case of Uber, Smith thinks it’s likely that many of the current congestion issues were because city governments did not invest enough in public transport and Uber took that as an opportunity to provide a service that acted as band-aid to the kind of challenges that emerge in cities.
“What I would say, the kind of pressure that we would put on the company, which we can do through engagement, even if we don’t divest, we can certainly incorporate that into our engagement with the company,” Smith said.
In the case of Facebook, Smith continues to monitor how the company responds to hate-speech. But she also highlights the positive role Facebook has played as a public service in spreading awareness about climate change issues and in the rise of veganism.
“With something like Facebook, it’s not in a prohibited category, because it’s not producing energy from fossil fuel,” Smith said. “It’s not directly abusing animals. It’s one of these companies that is kind of within an ecosystem, where it has the potential to act for good, or bad, depending on its policies. And so it’s one that we are certainly watching and we will consider where it stands in terms of the activities that we have prohibited within the platform.”
Ethical outperformance, but at a cost
All this complex analysis of companies sustainability practices isn’t cheap. The ETF currently charges 60 basis points, a 0.6% total expense ratio, which is relatively high compared to more mainstream ETFs. State Street’s S&P 500 ETF has a fee of 0.09%, according to Morningstar.
Smith justifies the cost knowing that very few funds maintain such strict screening criteria for climate and human and animal exploitation issues.
“I also think [investors] have to attribute some value to the work that we’re doing, in terms of identifying the stocks that we should be excluding, it’s not a trivial, it’s not a simple exercise, which I think is borne out by the fact that nobody else has even tried to even try to do it,” Smith said.
However, with the number of sustainable ETFs and mutual funds on the rise, the question is whether investors will still be willing to pay a relatively high fee for VEGN’s outperformance.
Smith doesn’t see the increase in competition as a problem, but more as an advantage.
“If other companies do decide to do this, then our fund will continue to outperform, because it’s then that other people jump on this bandwagon and decide to divest from animal agriculture in the same way as they had have divested from fossil fuels, it will exert a negative pressure on their stock price,” Smith said.
“And so, we will look good on the back of other people doing the same things in their portfolio as we’ve already done to ours.”