Invesco Canada has introduced two new ETFs providing exposure to ESG-adjusted versions of prominent Nasdaq indices.
Pat Chiefalo, Head of ETFs & Indexed Strategies at Invesco Canada.
The Invesco ESG NASDAQ 100 Index ETF (CAD: QQCE CN; CAD-hedged: QQCE.F CN) and Invesco ESG NASDAQ Next Gen 100 Index ETF (CAD: QQJE CN; CAD-hedged: QQJE.F CN) have been listed on Toronto Stock Exchange and come with management fees of 0.20%.
The Invesco ESG NASDAQ 100 Index ETF is based on the Nasdaq 100 ESG Index, which is derived from the Nasdaq 100 universe.
The Nasdaq 100 consists of 100 of the largest US and international non-financial companies listed on Nasdaq.
The Invesco ESG NASDAQ Next Gen 100 Index ETF, meanwhile, is based on the Nasdaq Next Generation 100 ESG Index which is derived from the Nasdaq Next Generation 100 universe.
The Nasdaq Next Generation 100 comprises the largest 100 non-financial Nasdaq-listed companies outside of the Nasdaq 100.
The ESG versions of these indices filter their starting universes using business activity and controversy screens before re-weighting the remaining constituents in favour of those better managing their ESG risks.
The methodology first excludes violators of UN Global Compact principles, companies embroiled in severe ESG-related controversies, and firms deriving revenue from business activities linked to adult entertainment, alcohol, arctic oil and gas exploration, recreational cannabis, controversial weapons, gambling, military weapons, nuclear power, oil and gas, oil sands, riot control, shale energy, small arms, thermal coal, or tobacco.
The methodology then harnesses the insights from ESG data analytics specialist Sustainalytics to assign each remaining stock an ‘ESG Risk Rating’. The ESG Risk Rating reflects an organization’s unmanaged ESG risk and is composed of three components: corporate governance, financially material ESG issues (factors that could reasonably impact a company’s economic value), and idiosyncratic issues (black swan risks that could be detrimental to economic value). Companies with ESG Risk Ratings above 40 (considered severe) are removed.
Finally, the constituents of the universe that remain after these two processes are weighted using a combination of their market capitalization and an ESG score, which broadly reflects the inverse of that company’s ESG Risk Rating.
Due to the concentration of certain large-cap stocks in the Nasdaq 100, the Nasdaq 100 ESG Index also applies several constraints aimed at enhancing diversification. These include a weight cap of 14% on the largest constituent, an aggregate cap of 40% on the five largest companies, and an individual cap of 4.5% on any company outside of the top five. Reconstitution and rebalancing occur on a quarterly basis.
The methodology presently results in the exclusion of six stocks from the Nasdaq 100, namely Honeywell, Analog Devices, Exelon, American Electric Power, Xcel Energy, and Peloton.
Compared to the regular index, the Nasdaq 100 ESG Index has increased exposure to the technology sector (61.9% vs 49.9%) and reduced exposure to the consumer discretionary (10.6% vs 17.7%) and communication services (16.6% vs 18.4%) sectors. Notable positions include Microsoft (15.0%), Apple (12.5%), Alphabet (7.0%), Nvidia (7.0%), Amazon (3.5%), Adobe (3.1%), Tesla (2.5%), Netflix (2.4%), and Cisco Systems (2.3%).
The Nasdaq Next Generation 100 ESG Index, meanwhile, has ten stocks removed from its starting universe, namely Caesars Entertainment, DraftKings, Royalty Pharma, 10X Genomics, Alliant Energy, Penn National Gaming, Novocure, Wynn Resorts, Beyond Meat, and Vimeo.
The index is exhibits increased exposure to the technology sector (52.9% vs 45.2%) and reduced exposure to healthcare stocks (11.5% vs 18.4%). In line with the regular Nasdaq Next Generation 100 Index, the index also has significant exposure to consumer discretionary (14.8%) and communication services (11.4%) sectors. The index is diversified at the constituent level with the largest positions being Fortinet (3.7%), Zscaler (3.3%), and Zebra Technologies (2.7%).
All data as of 12 November.
Pat Chiefalo, Head of ETFs & Indexed Strategies at Invesco Canada, commented: “As a continuation of our critical partnership and collaboration with Nasdaq, we have developed the next generation solution for investors seeking access to innovative companies as part of their portfolio. Today’s ETF launch provides access to disruptive market themes filtered through Nasdaq’s robust ESG criteria, supported by Sustainalytics’ market-leading ESG data, offering investors another unique way to help meet their desired investment outcomes.”
Lauren Dillard, Executive Vice President and Head of Investment Intelligence at Nasdaq, added: “The interest in integrating ESG considerations into investment portfolios is on the rise globally. We are pleased to work with Invesco to introduce a refined and ESG-friendly version of one of the world’s most preeminent benchmarks. The strength of the Nasdaq 100 Index underscores the innovation and transformative changes of the companies within their respective industries. Our partnership with Invesco continues to expand the suite of Nasdaq 100 and other Nasdaq index-based products to provide investors with optionality that can meet their preferences and help achieve their investment goals.”