Offering Equity Diversification While Aligning with Investors' Values

Would you please discuss the S&P 500 Index’s year-to-date performance through June 30, 2024?

Market performance has been a continuation of 2023, where very few stocks have driven returns, making it a challenging environment for active investors to outperform their benchmarks. In 2023, seven stocks accounted for 90% of the S&P 500’s performance of the S&P 500 for a significant portion of the year. In 2024 through June, five stocks (NVIDIA, Broadcom, Apple, Microsoft and Google) accounted for 101% of the performance of the S&P 500. Significantly, the quarterly return spread between the S&P 500 and the S&P Equal Weight Index was among the highest it’s been in 20 years.

The market has been primarily driven by investors’ enthusiasm for companies with exposure to the development of artificial intelligence (AI). We believe it is likely that the market will begin to revert to an environment where there will be more breadth and more company participation.

What sectors or themes would surprise investors to be ESG-friendly? 

We believe there are certain companies in market segments not generally thought of as ESG-friendly sectors, yet they are critical to the success of traditional ESG-friendly companies. For example, with the energy transition to a lower carbon economy, companies that mine copper, cobalt and other non-ferrous metals required for car batteries, wind turbines, solar and other modern technology are essential.

One company that stands to benefit from the transition to cleaner energy is copper producer Freeport McMoRan. We believe the company is well run and has a tremendous interest in protecting the environmental and human capital. Some of its mining is on tribal land with a significant level of human capital deployed. As a result, management believes it is imperative to be outstanding citizens to continue to renew its license and operate. 

How is the portfolio positioned after rebalancing at the end of the second quarter?

The Hennessy Stance ESG ETF actively invests in companies that score well on ESG metrics and are most likely to outperform both in absolute and risk-adjusted returns. As always, the ETF avoids companies with exposure to tobacco, guns and ammunition, and fossil fuel industry.

More stocks met this criteria at the end of the second quarter, and as a result, the ETF holds 45 companies diversified across 8 sectors as of June 30, 2024. In a current market where only a few AI stocks have dominated returns, the ETF provides diversification to companies and aligns with investors’ values.

What is your investment case for sustainable investing over the next year or so?

We believe sustainable investing is a proxy for finding better managed companies that can deliver greater value to shareholders by being good stewards of the environment, drive employee engagement, and excel as corporate citizens in their communities.

We believe ESG has generally been politicized but is not going away as too many large institutional investors intend to invest their clients’ funds in a fiduciary manner. While fewer companies may be publicly identifying their actions as ESG-friendly, we believe many companies will continue to decarbonize because it provides the potential for mitigating risk, attracting better employees, charging premium pricing and growing revenues sustainably.