Investors in a $925m ETF tracking the S&P 500 have been compelled to adopt an ESG approach or redeem from the fund, potentially triggering a taxable event, following a decision by Amundi to change its underlying index.

Amundi has aligned its physically replicating S&P 500 ETF with ESG principles.

Since Friday, the Luxembourg-domiciled Amundi Index S&P 500 UCITS ETF – now rebranded Amundi Index S&P 500 ESG UCITS ETF – has been tracking the S&P 500 ESG Index.

The newly adopted index screens the bellwether US index to exclude companies with weak adherence to UN Global Compact principles and those involved in the tobacco or controversial weapons industries.

Firms with the poorest ESG profiles that make up 25% of the market capitalization in each GICS industry group are also removed.

While investors were given five weeks’ advance notice of the change and the option to redeem without incurring redemption fees, the new index represents a distinct change of mandate for the fund which some investors may consider an imposition.

Portfolio cull

For those investors who decided to stay put, the adoption has translated into a considerable chunk of their portfolio being offloaded with some well-known names among those getting the chop. Companies such as Berkshire Hathaway, Johnson & Johnson, Netflix, Paypal, Walt Disney, Walmart, Honeywell, Oracle, IBM, and Boeing have all been jettisoned. In total around 200 companies have been culled.

Whilst the weights of the surviving firms have been adjusted so that the overall sector allocations remain broadly in line with the regular S&P 500, there have nevertheless been some material changes to the composition of the portfolio. Apple, Microsoft, Amazon, Alphabet and Facebook, for example, have all seen their weights increase by about one-third.

With a recent US Congressional report raising a series of red flags concerning potential abuses of market power and anti-competitive behaviour by Amazon, Apple, Alphabet and Facebook, along with potentially inflated valuations in the US technology sector, investors will need to be alive to these changes and the implications for the overall risk profile of their portfolios.

Damascene conversion

By performing the conversion, Amundi has instantly created one of the largest ESG S&P 500 ETFs in Europe. In doing so, the Paris-based issuer is no doubt hoping that it can capitalize on the fund’s ready-made scale, liquidity and track record to capture a greater slice of the growing ESG market.

The fund maintains its current expense ratio of 0.15% as well as its original ticker codes – the fund trades in euros on Euronext Paris (S500 FP), Xetra (F500 GY), and Borsa Italiana (S500 IM), in US dollars on Euronext Amsterdam (U500 NA), and is also available in a euro-hedged share class on Euronext Paris (S500H FP).

Amundi still offers a regular S&P 500 ETF – the $6.8bn Amundi S&P 500 UCITS ETF (500U LN) – which uses synthetic (or swap-based) replication.

There are currently two other ETFs in Europe that track the same S&P 500 ESG Index. These are offered by UBS and Invesco. The $1.0bn UBS S&P 500 ESG UCITS ETF (S5SD LN) comes with an expense ratio of 0.12%, while the $140m Invesco S&P 500 ESG UCITS ETF (SPXE LN) charges a management fee of 0.09% and a swap fee of 0.11%.

Meanwhile, State Street Global Advisors offers the $180m SPDR S&P 500 ESG Screened UCITS ETF (SPPY GY). This fund tracks the slightly less draconian S&P 500 ESG Exclusions II Index which eliminates companies linked to controversial weapons, civilian firearms, tobacco and thermal coal as well as companies non-compliant with the UN Global Compact but does not use ESG ratings to further slash the portfolio. Indeed, fewer than 40 stocks are removed. This ETF’s expense ratio is 0.10%.