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  • Home>Research & Insights>Investment Insights>The Gender Diversity ETF

    The Gender Diversity ETF

    Women are underrepresented on most corporate leadership teams. This exchange-traded fund screens for stocks that do better on this front than their peers.

    Alex Bryan, 09/29/2017

    It is valuable to have different perspectives represented within a corporate leadership team. Cognitive diversity can lead to more-thoughtful decision-making, making it more likely for members to challenge each other's assumptions, thereby reducing blind spots and group-think. While it doesn't guarantee diversity of experience and thought, gender diversity in a firm's leadership ranks is a good sign that it values different points of view, since men and women often approach problems differently. It also suggests that the firm is drawing leaders from a larger pool, which should help it source better talent. Yet, the leadership ranks at most firms are still dominated by men.

    SPDR SSGA Gender Diversity ETF SHE offers an effective way to invest in firms that have a greater number of women represented in the upper echelons of their organizations relative to their sector peers. This exchange-traded fund's index ranks large- and mid-cap U.S. stocks on a few ratios that measure the number of women to men in executive and board roles and targets those with the highest scores representing 10% of the collective market capitalization in each sector. While this approach could, in theory, lead to a lack of gender diversity by favoring firms with leadership teams principally composed of women, in practice, we're a long way from this becoming an issue.  

    Despite its focus on a narrow sliver of the market, this portfolio is fairly well-diversified. It currently sweeps in around 170 stocks, including Pfizer PFECoca-Cola KO, and Lockheed Martin LMT. The fund's top 10 holdings represent around 38% of the portfolio. The fund weights these holdings by market capitalization, which reflects the market's view about their relative value. Sector-relative stock selection keeps most of the fund's sector weightings in line with the broader market, but there are some notable exceptions. Healthcare and consumer defensive stocks carry larger weightings here than they do in the Russell 1000 Index, while the fund is underweight technology stocks.

    The portfolio falls squarely in large-blend territory, though it has a smaller market-cap orientation than the Russell 1000 Index. And while smaller stocks tend to be less profitable than their larger counterparts, the fund's holdings have tended to generate comparable to slightly better average returns on invested capital (a measure of profitability) than the constituents of the Russell 1000 Index. It also has slightly greater exposure to stocks with wide Morningstar Research Services Economic Moat Ratings, Morningstar's assessment that a firm enjoys a durable competitive advantage.       

    The fund was launched in March 2016, so its performance record is limited. From its inception through August 2017, the fund exhibited only moderate tracking error against the Russell 1000 Index, despite its high active share. However, during that time, it lagged that benchmark by 3.4% annualized, partially because of less-favorable stock exposure in the healthcare sector. Investors shouldn't read too much into the fund's limited record. There is nothing about its construction approach that would likely put it at a material performance disadvantage over the long term. 

    Even if the fund does not beat the market, it can still offer an attractive way for investors who care about gender diversity in corporate leadership to express that preference. The fund charges a reasonable 0.20% annual fee and donates a portion of that revenue to SHE Impacts, a donor-advised fund that supports charitable organizations that prepare girls to become future business leaders. SHE Impacts provides grants to organizations that encourage girls to go into fields where women are poorly represented, such as science, technology, and math. It also supports programs that promote gender diversity in corporate leadership.    

    State Street Global Advisors (SSGA), which manages the fund, goes further to promote gender diversity on corporate boards. If a firm does not have any women on its board, SSGA will use its proxy votes to vote against the chair of the nominating committee. The firm applies this policy uniformly across all the funds it manages. 

    Portfolio Construction
    The fund employs full replication to track the market-cap-weighted SSGA Gender Diversity Index. This index starts with largest 1,000 U.S. companies by market capitalization and ranks all stocks in each sector on three gender diversity ratios: 1) the ratio of female executives and board directors to all executives and board directors, 2) the ratio of female executives to all executives, and 3) the ratio of nonboard female executives to all nonboard executives. It relies on a third party for this data, which defines executives as employees who hold the position of vice president or higher in all sectors except the financials sector, where employees must hold the position of managing director or higher. It then targets the highest scoring stocks representing 10% of the collective market capitalization in each sector. Qualifying companies must also have at least one female CEO, chairperson, or member of the board of directors. The index is rebalanced annually in July.

    Alex Bryan is an ETF analyst with Morningstar.