PIMCO has teamed up with smart beta index specialists Research Affiliates to launch a multi-factor US equity ETF with ESG considerations.
Andrew Pyne, Executive Vice President and strategist focused on PIMCO’s equity solutions.
The PIMCO RAFI ESG US ETF (RAFE US) has launched on NYSE Arca with seed capital of $13 million.
While PIMCO is best known for its fixed income expertise, the firm has a growing equity franchise and a long-established relationship with Research Affiliates.
The fund is linked to the RAFI ESG US Index which seeks to achieve the dual objectives of social responsibility and long-term outperformance of similar market cap-weighted indices.
The index starts with an investment universe of large and mid-cap US-listed equities. Research Affiliates defines large and mid-caps as those companies that fall within the top 86% of the total US equity universe according to “adjusted fundamental weight” – a multi-factor scoring methodology based on free-float, de-leveraged sales, cash flow, dividends plus buybacks, and book value.
Turning to ESG considerations, the index uses an expanded definition of socially responsible companies that considers a broad ESG scoring methodology as well as separate gender diversity and financial discipline metrics.
Individual E, S, and G scores are provided by third-party ESG analyst Vigeo Eiris which assesses companies based on sector-specific performance across more than 300 indicators over 38 sustainability categories.
Vigeo Eiris also provides Diversity scores for each eligible firm based on seven metrics related to gender diversity in the workplace.
Finally, Research Affiliates offers Financial Discipline scores which seek to identify companies with high profitability, low investment, low issuance, and low accruals.
Each of the E, S, G, Diversity, and Financial Discipline scores are based on the firm’s percentile rank relative to other companies in the selection universe.
Any firm that ranks in the bottom 10% for each of the E, S, G, Diversity, and Financial Discipline scores are excluded. Additionally, any company involved in controversial industries including tobacco, gambling, weapons, fossil fuels, coal, tar sands, and oil shale is also removed.
The remaining constituents are then assigned a composite score based on an equally weighted average of their E, S, G, Diversity, and Financial Discipline scores. The index is weighted according to a combination of composite ESG score and “adjusted fundamental weight”. Reconstitution occurs annually, and the index is rebalanced on a quarterly basis.
The fund comes with an expense ratio of 0.29%
Andrew Pyne, Executive Vice President and strategist focused on PIMCO’s equity solutions, commented, “PIMCO is excited to continue to partner with Research Affiliates in offering differentiated equity strategies for our clients. The PIMCO RAFI ESG US ETF marries the performance potential of fundamental indexing with a unique approach to ESG, helping to drive the potential for improved returns over the broader market and social responsibility for investors.”
Katy Sherrerd, Chief Executive Officer of Research Affiliates, added, “We’re proud to be partnering with PIMCO on this innovative smart beta equity ETF. With its thoughtfully designed ESG investment themes, it offers investors an opportunity to pursue positive returns while also helping to drive positive societal change.”
The fund is the latest manifestation of PIMCO’s growing commitment to ESG, following swiftly on the heels of the launch of the PIMCO Enhanced Short Maturity Active ESG ETF (EMNT US). This fund serves as an ESG-conscious alternative to PIMCO’s widely popular active short-duration debt fund – the $13.6bn PIMCO Enhanced Short Maturity Active ETF (MINT US).