Since the Securities and Exchange Commission Crackdown The cavalier use of the “environmental, social, and governance” label by investment product developers last May has seen many exchange-traded fund issuers move away from their earlier “greenwashing” practices. iShares is no exception and has recently added a stable of ESG and non ESG products iShares Breakthrough Environmental Solutions ETF (ETEC). The fund has a 47 basis point expense ratio so if you invest $1,000 in a calendar year, $4.70 of that investment will go to fees over that period.
Let’s have a look.
Contents = packaging?
The fund’s website promises to feature “companies involved in breakthrough innovation and development of new technologies that address climate change.” The use of the word “change” instead of “change” is an interesting choice and one that makes me think that iShares may be making some “safe” decisions when it comes to security selection as well.
ETEC is a passively managed fund and tracks Morningstar Global Emerging Green Technologies Select index , so let’s look at the index method. The index was launched on November 29, 2022 and has been re-examined through the end of 2018. From the beginning, the approach says that companies must generate at least 25% of revenue from “innovative green technologies” which is well outside my comfort zone for a targeted strategy like this.
Let’s see what are the other eligibility requirements.
Welcome to the weed
From a liquidity perspective, index components must have a market capitalization of at least $300 million and trade at least $2 million per day over the trailing three-month period. While the market cap is minimal for the scale of asset accumulation that iShares expects from its products, an average daily minimum of $2 million will help manage overall liquidity in the subsequent portfolio.
The details of the selection process refer to the Rogers innovation adoption curve derived from diffusion of innovation theory, first published and reviewed by Everett Rogers in 1962. here. Analysts measure companies’ place on the adoption curve in eight categories, including energy efficiency, green buildings, green transportation, pollution prevention and reduction, renewable energy, resource efficiency technologies and services, sustainable agriculture, food and forestry, and water. Of the five innovation curve categories, only the first three are scored.
The index is set to 50 components and is weighted using float-adjusted market capitalization meaning that any individual position or any insider holding greater than 10% of the shares is considered closely held and is not included for weighting purposes. Individual positions are capped at 6% and the sum of all positions above 4.5% cannot exceed 45%. This last rule is based on the IRS diversity rule that weightings greater than 5% cannot sum to 50%, the 5/50 rule. Violation of this rule means that the fund will not qualify as a Registered Investment Company (RIC) and will subsequently be charged an additional 4% tax at the end of the year.
Wrap it up
Although there is some overlap between these funds and iShares Global Clean Energy ETF (ICLN) With 15 of the current 49 holdings shared between the two, the fund has plenty of daylight. One thing I found interesting is that about 20% of the fund is in Chinese companies through US-listed ADRs, Hong Kong and Mainland listings. Despite the 25% revenue exposure threshold, I don’t see any names out of place. While there are some exposures that could be problematic for environmental purists because of second-order issues like mining impacts from electric vehicle adoption and the need for subsequent battery components, ETEC appears to deliver what it advertises.