First Trust has launched a new ETF in the US which provides exposure to firms that are reducing, or planning to reduce, their carbon footprint.
The fund provides actively managed exposure to utility and energy companies that are working to improve their carbon footprints.
The First Trust EIP Carbon Impact ETF (ECLN US) has listed on NYSE Arca and comes with an expense ratio of 0.95%.
The fund is actively managed and sub-advised by Energy Income Partners, a Connecticut-based investment firm focused on opportunities within the energy space.
The fund selects its constituents from a universe of US-listed stocks and American Depository Receipts (ADRs) of firms operating in the energy and utility sectors.
It may also invest in master limited partnerships (MLPs) with operations in the energy sector.
Eligible firms include traditional utility companies, owners of natural gas pipelines, renewable energy manufacturers, as well as companies providing ancillary goods and services for the energy sector such as renewable energy equipment or energy storage capabilities.
Companies that have no plans to reduce their carbon emissions or have a strategic commitment to activities such as coal production, crude oil exploration and production, and crude oil transportation, storage, and delivery will not be eligible for selection.
Energy Income Partners uses its proprietary screening methodology to identify companies that are reducing their own carbon emissions or facilitating the reduction of carbon emissions or the increased use of renewable resources across the broader market.
James Murchie, President and CEO of Energy Income Partners, commented, “Electric utilities and gas pipelines sit at the centre of the transition to a cleaner, more sustainable energy system. Since peaking in 2007, US carbon dioxide emissions have declined by 12% through 2018, and the electric power sector – comprising a mere 2%-3% of S&P 500 market capitalization – has driven 90% of that reduction by replacing coal-fired generation with solar, wind and cleaner-burning natural gas.”
Once the pool of eligible securities has been reduced through the above business activity screens, the fund managers aim to select stocks that are expected to outperform over the long-term.
Energy Income Partner’s approach is to invest with the regulated monopoly shippers of energy who may benefit when the cost of the energy they are shipping declines, unlike the upstream energy producers whose fortunes are tied to commodity prices.
The firm believes this approach remains sound in a transition to lower-carbon energy; the “upstream” makers of wind turbines and solar panels operate in a competitive market that may pressure prices and margins, but the buyers of those products, including utilities and their customers, may benefit as costs decline.
Stocks are also judged on quantitative and qualitative metrics. According to the ETF’s prospectus, the fund managers will favour dividend-paying companies with strong balance sheets, stable cash flows, a high-quality management team, and a sustainable business model.
“This unique strategy provides exposure to companies that may have the greatest impact on reducing carbon emissions, while also pursuing attractive risk-adjusted returns, with a relatively stable stream of income,” said Ryan Issakainen, Senior Vice President, ETF Strategist at First Trust.
As of 19 August 2019, the fund’s portfolio contained 29 holdings.