The company behind the first-ever index tracking LGBTQ equality and consumer sentiment launched an ETF tied to its proprietary metric.
Tennis legend Martina Navratilova, former U.S. Rep. Barney Frank and other high-profile board members of LGBTQ Loyalty Holdings and its Loyalty Preference Index
“Today is an important day for advancing equality, as we showcase companies that align and support the LGBTQ community through this announcement,” Navratilova said in a statement. “Seeing the trading symbol ‘LGBT’ listed on Nasdaq is truly historic.”
Frank said in a statement: “I’m very proud to be part of this doubly beneficial effort: it provides supporters of LGBTQ equality with access to investments that reflect their values, while simultaneously rewarding businesses that demonstrate that ethical behavior and profitability are fully compatible.” Other board members include former baseball star and the current special assistant to the Major League Baseball Commissioner Billy Bean and onetime professional tennis player Bobby Blair, who is the firm’s CEO.
In addition to commissioning the survey by analytical firm Fuzzy Logix, LGBTQ Loyalty tapped ETF manager Andrew Chanin of Procuream to oversee the new product. While it comes with a high price tag for a large-cap ETF, its creators say the product offers access to the firm’s annual listing of equities based on its substantial screening process and the potential to encourage more large corporations to follow the example set by those making it into the fund’s holdings.
Channin explained the methodology and the fund’s expected base of clients and institutional investors. The conversation has been edited for length and clarity.
FP: The LGBTQ + ESG100 ETF officially launched on May 18. What is the investment criteria and strategy for the new ETF product?
Chanin: There's a lot of thought behind building what we believed was both an authentic and inclusive final product. This was something that was more than three years in the making, so we were thrilled to bring this product out.
Starting with the index, let's break it down: It starts with the universe of roughly 500 companies — U.S. large cap, domestic companies — listed on U.S. exchanges. From there, we take various ESG ranking information from third parties, and we utilize that to do an ESG filter. What is left is a few hundred less than the original 500 companies that passed the initial ESG screen.
From there, there's a survey that is done by another third party. This survey went out to over 150,000 LGBTQ+ households across the United States, asking them various questions regarding the remaining companies, from brand awareness, brand image, loyalty, community support, spending habits that they believe that they may have toward those companies in the future. And from that survey, the results are then processed, ranked, scored and we are left with a universe of 100 companies that are then put through another ranking system that's proprietary to the index provider, that weights based on certain factors looking at things such as volatility.
FP: For the 18-month period from November 2019 to April 2021, the LGBTQ100 ESG Index had a 43.84% return, compared to a 37.65% return for the S&P 500. To what do you attribute that outperformance of the S&P?
Chanin: I can't really speak to performance. I think it makes sense to break down why we thought that this approach — and, more importantly, why the survey aspect of this approach — was really important as well as, we believe, meaningful for building a robust index, and therefore an ETF, around it.
When looking at the LGBTQ+ community as a demographic, various studies have shown that it is one of the most loyal [regarding] brand preference loyalty and, in particular, with regards to their spending habits. [With] companies that the LGBTQ+ community believes are supportive and aligned and champions of their community, there is a much stronger brand preference and loyalty.
In addition to that, the LGBTQ+ community in the United States, through studies that we've seen, has 30% more annual disposable income, on average, than non-LGBTQ+ households. And that amounts to a significant amount of money when factoring that this money being spent by this demographic has this loyalty aspect to it.
To the index provider, and we agree with them, it was very important to survey this community because in previous attempts to try to quantify inclusiveness and equality of the LGBTQ+ community at various large cap companies across the U.S. and beyond, many of these ranking systems relied predominantly on the internal C-suite and HR departments at these companies to check certain boxes to say what they're doing.
And although they might be able to prove that they're doing some great things for the community, ultimately if the LGBTQ+ community is the one that is very loyal with their spending habits, and they're going to spend based on how they feel, to us, not including their opinion in that process was a huge miss. So for us, it was extremely important — not just because we are creating a product using the ticker “LGBT” on it, but believing truly that it should be representative of how this community feels. And by only going to the companies to get their take, it's very difficult to see how what they're doing actually resonates with this community that we're hoping to help.
FP: For potential investors, what is the expense ratio of the fund?
Chanin: It’s 75 basis points.
FP: As the CEO of Procure Holdings, you’re an experienced fund manager. How big do you expect this ETF to grow in terms of financial advisor and client adoption and overall fund flows?
Chanin: It's always difficult to predict. I think most fund managers would be kidding you if they didn't want to see their fund as big as possible. That said, this is a very scalable product because it is using some of the largest, most liquid, large cap companies in the United States as its holdings. It would have to get extremely large, and probably larger than the S&P 500 itself, before it actually starts potentially hitting some capacity issues.
We think that this is a product that could appeal to many different types of investors. Certainly those in the LGBTQ+ community who want to invest in companies that they believe are doing better and more for their community. But also allies of that community, because we believe that by doing this annual survey and doing this reconstitution every year, it forces companies that do truly care about how they're perceived by this demographic to continuously keep on trying to do better.
As more assets come into the fund, we hope it helps businesses, whether they're ones that can be included in this fund and index or even just private companies or small cap companies or foreign companies, use this information of how individuals view certain companies to try to do better so they can be viewed in a positive light as well. Not just because it sounds good, but because it is the right thing to do. And hopefully by doing things that are beneficial and viewed by this community as beneficial and positive, they too can potentially do better as a business themselves, whether it's people from the community spending more at those companies or being able to attract better employees because [they] feel comfortable working there.
Although raising assets and having a high number is a great goal, I think there are many other great goals that we can hopefully accomplish. This may not just appeal to retail investors or advisors that are allies or themselves members of the LGBTQ+ community, but we're seeing more push for various ESG mandates. So to the extent that this is [used within] a pension fund and endowment foundation, not only does this fund have an index that has an ESG screen, and input from the LGBTQ+ community, it’s a way that those investment advisors, who in many cases are investing on behalf of others or their employees, can invest in to show that they too are aligned and support what we're trying to do.
FP: LGBTQ Loyalty Holdings has quite a star-studded board, including former Rep. Barney Frank, tennis legend Martina Navratilova and MLB executive Billy Bean. What’s it like working with so many big names on a project of this type?
Chanin: Let's go back in time. This wasn't something that, that myself or my company said, "Hey, we want to go out and we want to launch this product." This concept actually came to us from members of the LGBTQ+ community who wanted to see this product. And they came to us saying, "How can we build this and will you work with us?" And we became very excited by it and by the idea of working with a team from this community to help them build the product. They've been phenomenal in building a very impressive board of the likes of the individuals that you mentioned. For us, it's extremely encouraging that these individuals are willing to put their name and reputation behind an index such as this and that they truly believe in what we're trying to do here, because, for us, the last thing we wanted to do is create something that looked like a gimmick. You know, you just slap someone's cause on it and try to bring in fees from it.
Having gotten to meet these individuals at an event well over a year ago now and, some of them, several times since then, it's amazing. Just hearing their stories of why they're so passionate about trying to increase equality and inclusion and diversity, some of these stories are just absolutely so touching. I think without actually understanding or hearing these stories — from them and others — people don't understand how important diversity, inclusion and equality truly are. To work with them to effect change at a corporate level and hopefully beyond is a monumental task and one that we're excited to be partnered with on that endeavor.
FP: In the five largest investing markets worldwide, socially responsible funds have amassed more than $30 trillion in assets, according to the Global Sustainable Investment Alliance. Where do you expect that number to go in future years and how does this new ETF fit into the current range of products for socially responsible investors?
Chanin: I think we're just scratching the surface on ESG. There will always be critics of any type of investment style or factor or filter or anything like that, but I truly believe we're in the early days of awareness of ESG investing. And I think as competition increases in the ESG space, that will benefit end-investors because hopefully the quality of the products that are created will be forced to continue to get better and better.
When we were learning about the ESG marketplace and having conversations, we came across some very high-ranking individuals in the pension world, and it's a growing theme that mandates are being created to invest in ESG — not just in the U.S. but abroad.
The one tricky thing is that across the board there's almost no consensus as to what is qualifying as ESG and what was really, to us, the biggest fear [would be] a pension fund manager investing in ESG and possibly even paying slightly more than just a very broad range index fund and paying more to invest in ESG and potentially underperforming the S&P 500. Underperforming could be cause for them losing their jobs. So while they know that certain mandates are coming down the pipeline, they don't want to necessarily invest in something that possibly underperforms and, on top of that, may then be later viewed as actually not being within the ESG scope that they're trying to get exposure to.
There are, in this current stage, various investors trying to figure out how to meet these mandates, what ESG means to them and where are the appropriate vehicles to use in order to achieve those mandate targets. And we're absolutely not there yet because there is no global agreement. I don't think we'll ever see a global agreement on what truly is ESG versus what is not. As pensions, endowments, foundations, large institutional investors and family offices start to more firmly develop their definition of ESG, I believe that could be the next catalyst for growth.
