An ETF Offering Both Diversification and Sustainability

Key Takeaways

» Market performance in Q3 2025 was driven by large-cap strength, with a U-shaped size effect favoring both the largest and smallest stocks.

» The S&P 500® Index has become increasingly concentrated, with the Magnifi cent Seven now comprising about 35% of the index, creating the illusion of diversifi cation while heightening systemic risk as mega-cap tech companies grow more interdependent.

» Portfolio additions in the quarter include Autodesk, AutoZone, and Booking Holdings.

» Given a backdrop of slowing growth and mounting pressure for tangible AI returns, we see better relative opportunities outside of the high-profi le AI names.

Would you please discuss the factors that drove market performance over the third quarter?

In terms of what drove the market, size massively outperformed with the S&P 500® Index rising 8.12% over the third quarter of 2025. By comparison, the S&P 500® Equal Weight Index only increased 4.83%.

However, there was an unusual effect in the third quarter where smaller stocks had strong performance. This U-shaped performance distribution by market cap does not generally benefit the portfolio positioning as the ETF generally has a market cap distribution that is more similar to the S&P 500® Equal Weight.

How do you think about portfolio construction and risk management when such a large portion of the S&P 500® is concentrated in just a handful of companies?

When the Hennessy Sustainable ETF was launched at the beginning of 2014, the largest single holding in the S&P 500® Index represented just 2.8% of the Index. Now, the Magnifi cent 7 stocks collectively account for approximately 35% of the total Index. While investors assume they are well-diversifi ed simply because they hold an investment that tracks the S&P 500®, the Index’s increasing concentration tells a different story.

Another concern is the high degree of interdependence among mega-cap technology companies—specifically between Nvidia, Advanced Micro Devices, Microsoft, Google, Meta (Facebook), Oracle and a few others. Their revenue and capital expenditure are closely interrelated and correlated, as these fi rms rely on one another’s products and infrastructure. As a result, the apparent diversifi cation within the Index may mask signifi cant underlying fundamental and systemic risk.

In today’s market, understanding and managing concentration risk is more important than ever for achieving diversifi cation and long-term returns.

How are sustainable companies implementing artificial intelligence (AI) in their businesses while being cognizant of the heavy energy use?

Companies’ implementation of AI depends on multiple factors, including industry, model, and automation type. Large language models used to interact with external tools and APIs can be expensive for training. However, using pre-trained models will reduce inference costs. Specialist models can reduce it even further, especially if the AI tool creates net energy savings.

What were the notable additions to the portfolio in the third quarter of 2025, and why?

When we rebalanced the portfolio at the end of the third quarter, we added Autodesk, a U.S. multinational software company, AutoZone, a retailer of aftermarket automotive parts, and Booking Holdings, a travel technology company, for various reasons tied to our disciplined, rules-based process.

Autodesk’s leading driver of inclusion was its return-on-equity. AutoZone was evaluated using a revaluation approach, in which we estimate the company’s value using market-based metrics and then compare it to its current trading price. On this basis, AutoZone appears undervalued. Finally, Booking has been seeing fundamental growth that is faster than its price growth.

While we rebalance the portfolio every quarter, some positions remain in the portfolio for multiple quarters. For example, we added Delta Air Lines last quarter because of stock momentum, as the company had consistent strength relative to the broader market in a volatile period.

All these names score well on sustainability metrics. We also believe these companies are most likely to potentially outperform both in absolute returns and in risk-adjusted returns over the next quarter.

What is your outlook for the rest of 2025 and going into 2026?

AI appears to be entering a “show-me-the-money” phase as the market transitions from the 1998-style enthusiasm to the more demanding environment reminiscent of 1999. Revenue growth across the AI ecosystem is beginning to slow, and unit economics remain challenging—margins remain negative and far from sustainable levels. Hardware suppliers such as AMD and Nvidia may soon face slower capital spending from their customers as shareholders begin to demand tangible fi nancial returns from the massive AI infrastructure investments made over the past year.

On the software side, while revenue growth has been strong in recent years, a new concern is emerging. Many AI-driven features carry signifi cant inference and per-unit compute costs. If these capabilities become bundled into existing products without meaningful price increases, gross margins could come under pressure as the incremental cost of AI usage erodes profi tability.

At the macro level, fundamentals appear to point to a deceleration in growth. Consumers are showing signs of fatigue, inflation remains persistent, and current policy choices, including the use of tariffs, are reducing competitive pressures. This dynamic is granting domestic producers greater pricing power, which in turn reinforces inflationary trends.

Given this backdrop, we see better relative opportunities outside of the high-profi le AI names.