Invesco’s new ETF offers similar profile to S&P 500 but with improved ESG score
Invesco has further broadened its range of ESG ETFs with the launch of the Invesco S&P 500 ESG UCITS ETF. The index the new fund will follow has been constructed to provide a risk and return profile similar to that of the broad S&P 500 index, but with significantly improved ESG characteristics.
Gary Buxton, Head of EMEA ETFs at Invesco, says: “The more we speak with different investors about ESG, the more we appreciate the extent to which their objectives may vary. As ESG becomes more mainstream, we believe that finding appropriate solutions is going to be increasingly relevant, for example for trustees and other investors who have a fiduciary responsibility for delivering performance.”
The S&P 500 ESG index makes improvements to both ESG and carbon intensity scores compared to the standard S&P 500 index, while overall sector exposures are broadly similar. Simulated performance of the index has also been broadly in line with the S&P 500, with a tracking error of 0.87% over the past five years.
The index methodology is robust but straightforward. The index offers exposure to the top 75 per cent of companies in each industry group ranked by their S&P Dow Jones Index ESG score. Index constituents are then weighted by market capitalisation. The index excludes companies that either are involved in tobacco or controversial weapons, have a low United Nations Global Compact score, or are in the bottom quarter of their industry group in terms of ESG score. The result is a market-cap-weighted index of 311 ESG industry leaders.
"We're excited to join forces with Invesco in Europe on the launch of the Invesco S&P 500 ESG UCITS ETF," says Reid Steadman, Global Head of ESG Indices at S&P Dow Jones Indices. "As more mainstream investors incorporate ESG into their core portfolios, S&P Dow Jones Indices is committed to offering global market participants innovative ESG indices, data and analytics to better align investors’ investments with their values.”
Chris Mellor, Head of ETF Equity and Commodity Product Management at Invesco, says: “We designed this ETF for investors who want their core US equity exposure to have ESG enhancements but to behave like the broader market. Our ETF structure offers efficiency and transparency, and the replication method being used offers the same potential performance advantage investors in our standard S&P 500 UCITS ETF enjoy.”
The ETF will hold a basket of high-quality securities and will aim to achieve the index performance through swap contracts. The objective of this method is to deliver closer and more consistent performance compared to full physical replication. The same key exclusions will be applied to the basket of securities as those of the index.
Mellor says: “Using swaps to gain exposure to certain US large-cap equity indices – including this one – enables the ETF to capture gross dividends, with no withholding tax. This offers a clear advantage over physically replicating ETFs, which are subject to as much as 30 per cent withholding tax on dividends.”