An AI-Driven Portfolio Aligned with Investors' Values

The Portfolio Managers provide their view on the equity market, their investment process, a few select holdings, and the key benefits of investing in the Hennessy Stance  ESG ETF.

November 2023
  • Kyle Balkissoon
    Kyle Balkissoon
    Portfolio Manager
  • Bill Davis
    Bill Davis
    Portfolio Manager

Information about the Hennessy Stance ESG ETF (the “Fund”), a semi-transparent actively managed exchange-traded fund ("ETF") with a Portfolio Reference Basket structure:

The Fund is different from traditional ETFs. Traditional ETFs tell the public what assets they hold each day. The Fund will not. This may create additional risks for your investment. For example:

  • You may have to pay more money to trade the Fund’s shares. The Fund will provide less information to traders, who tend to charge more for trades when they have less information.
  • The price you pay to buy Fund shares on an exchange may not match the value of the fund’s portfolio. The same is true when you sell shares. These price differences may be greater for the Fund compared to other ETFs because it provides less information to traders.
  • These additional risks may be even greater in bad or uncertain market conditions.
  • The Fund will publish on its website each day a “Portfolio Reference Basket” designed to help trading in shares of the Fund. While the Portfolio Reference Basket includes all the names of the Fund’s holdings, it is not the Fund’s actual portfolio.

The differences between the Fund and other ETFs may also have advantages. By keeping certain information about the Fund portfolio secret, the Fund may face less risk that other traders can predict or copy its investment strategy. This may improve the Fund’s performance. If other traders are able to copy or predict the Fund’s investment strategy, however, this may hurt the Fund’s performance.

For additional information regarding the unique attributes and risks of the Fund, see the Prospectus and SAI.

Would you please provide your view of the overall equity market?

In 2023, market performance has been dominated by a few large-cap stocks dubbed the “Magnificent Seven.” These companies include Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla which make up approximately 30% of the S&P 500’s market cap.
In the fourth quarter, the proportion of stocks that outperformed the S&P 500 Index in October was higher than the previous three quarters this year, which may be a sign that performance participation is beginning to broaden out. As investors absorb the results from the earnings season, we believe more companies will benefit.

As it pertains to the Hennessy Stance ESG ETF, half of the “Magnificent Seven” stocks have been excluded from the portfolio as they do not fit our ESG criteria and our artificial intelligence (AI) model overlay. Specifically, Amazon, Meta and NVIDIA did not score in the top half of their industry peer group in multiple ESG factors and/or did not have higher risk-adjusted return potential compared to peers. 

Of the Magnificent Seven, Microsoft is currently a top portfolio holding. The company has forecasted overall strong sales growth including cloud and software. The portfolio also owns Apple, Alphabet, and Tesla among its 35 holdings as of 9/30/23.

Why is Health Care among the portfolio’s largest sector weightings?

First and foremost, these companies must rank in the top half of peers in our proprietary ESG analysis and have the potential to outperform on a risk-adjusted return standpoint. As a final component of our process, we undergo portfolio optimization in an attempt to minimize tail risk and maximize diversification. 

Hence, several Health Care companies generally are included in the portfolio as these areas tend to be less correlated with each other and generally offer broad diversification. The ETF holds 10 Health Care holdings comprising nearly 30% of the portfolio. These holdings are in sub-industries including device and pharmaceutical manufacturers, health insurance companies and biotechnology businesses.

Would you please discuss a Health Care holding that fits your investment criteria?

We believe UnitedHealth Services, an American multinational managed healthcare and insurance company, is a good example. The company has been focused on creating a leaner cost structure and earnings growth is expected to be largely driven by demand. UnitedHealth has been experiencing margin expansion as it makes investments in automation and AI. In addition, the macroenvironment appears positive with a rising demand for health care as baby boomers age.

What are the key benefits for investing in the Hennessy Stance ESG ETF?

We believe the ETF offers investors the following benefits:

•    Best-in-class system: Our proprietary machine-learning model compares fundamental financial data with historical market data.
•    9+ year history: At Stance Capital, we have been actively building portfolios and employing this comprehensive model since 2014.
•    Focus on outperformance with lower risk: We focus on companies we believe are most likely to outperform their peers while providing less risk.
•    Aligned with investor values: The Fund was created for investors who want to have the potential opportunity to outperform the overall S&P 500 Index with less risk while still aligning their capital with their values.

Importantly, with the Hennessy Stance ESG ETF, we are looking for a dispassionate and structured way to invest in ESG-oriented companies that is consistently applied over time.