Focused on Outperformance, Lower Risk and Aligning with Investors' Values

The Portfolio Managers of the actively managed Hennessy Stance ESG ETF discuss their investment process, a few new holdings, what ESG factor is the most important to investors, and the current sources of demand for ESG products.

August 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.


Key Benefits— Hennessy Stance ESG ETF

»     Values Alignment: We select companies we believe 
have values aligned with our investors.
»     Outperformance: We seek to outperform the overall market.
»     Lower Risk: Risk Management is a distinct component 
of the portfolio construction process.

Would you please discuss how the portfolio is constructed?

Beginning with the S&P 500 Index, we remove companies that have exposure to weapons, tobacco, and fossil fuels, which totals approximately 30 companies. 

Then we overlay our proprietary ESG (Environmental, Social, and Governance) analysis, which entails ranking, scoring, and weighting the remaining companies against their industry group peers. In our analysis, we consider multiple ESG factors such as waste profile, water and energy utilization, carbon emissions, labor statistics, compensation, and diversity of board and senior management. Based on the results, the bottom 50% of companies are discarded while the top 50% or approximately 200 stocks, are further analyzed.

At the same time, we perform another analysis based on 20 years of historical financial and market data. This process attempts to predict the top 100 companies that may outperform on a risk-adjusted and total return standpoint. This fundamental model does not look at particular segments of the market; it is only considering the statistically likelihood of outperformance.

The intersection of these two analyses produces our list of ETF holdings that undergo portfolio optimization to minimize tail risk and maximize diversification. 

We repeat this process on a quarterly basis, adding or deleting companies or reweighting stocks based on their relative rank.

Would you please discuss a few new holdings?

First Solar, a manufacturer of solar panels, was purchased in the second quarter of 2023. From an ESG standpoint, the company receives high scores for sustainable revenue, sustainable investment, and carbon productivity. We also like First Solar from a fundamental standpoint.

In April, we purchased Amphenol, a major producer of electronic and fiber optic connectors. From an ESG standpoint the company also gets solid marks for sustainable revenues and investments. In addition, fundamentally they exhibit strong momentum. 

Among the E, the S, and the G in ESG, what factor currently appears to be the most important to investors? What is most important when building out the model?

In a general sense, most ESG investors are concerned about climate risk. We believe this concern becomes heightened as more investors personally experience the effects of climate change, including more destructive storms and floods, wildfire spreads and associated smoke, record-breaking heat waves, rising ocean surface temperatures, etc. 

That said, there are spikes in interest around S and G. We have 25 material risk factors that cover E, S, and G, but in carbon-intensive industries, the highest weightings are for carbon intensity and “green” product and services revenues, both of which are environmental factors.

What are the current sources of demand for ESG products?

Demand is coming from everywhere and in pockets that increase in size each year. Institutional investors, such as pension funds and endowments, have long been significant drivers of ESG demand. These large investors often have long investment horizons and have increasingly been integrating ESG factors into their investment decision-making process. Institutional investors are particularly concerned about long-term sustainability and risk management, which aligns with the goals of ESG investing.

As it pertains to retail investors, ESG investors skew younger, higher educated, and female. Millennial investors present the best opportunity for growth of ESG adoption. By gender, females express the strongest interest in the topic. Female decision-makers are an influential and growing segment across generational groups, and their interest in ESG-related topics provides a clear opportunity for engagement.  

We believe Financial Advisors recognize the changing preferences of their clients and the growing importance of ESG investing. Many Advisors have started offering ESG-focused portfolios and investment options to meet investor demand.