UBS Asset Management has expanded its suite of socially responsible strategies with the launch of an ETF that selects only the very highest-ranking S&P 500 constituents as measured by environmental, social, and governance criteria.

Clemens Reuter, Global Head of ETF & Index Fund Client Coverage at UBS Asset Management.

The fund has listed on a trio of exchanges across Europe and is referenced to the S&P 500 ESG Elite Index from S&P Dow Jones Indices.

Clemens Reuter, Global Head of ETF & Index Fund Client Coverage at UBS Asset Management, said: “The UBS S&P 500 ESG Elite ETF enables investors to take the next step in their sustainable journey and achieve more impact through their investments.

“As a market leader in sustainability ETFs, our ambition is to meet the demands of all types of ESG investors. We are proud to expand our sustainability offering in close collaboration with S&P Dow Jones Indices.”

Methodology

The underlying reference index is designed to comprise only the cream of S&P 500 constituents as measured by ESG criteria while maintaining similar overall industry group weights to the index.

The methodology first excludes companies from a wide range of controversial industries including tobacco, alcohol, genetically modified organisms, gambling, adult entertainment, controversial and military weapons, small arms, predatory lending, nuclear power, and fossil fuels.

Firms that are embroiled in severe ESG-related controversies, as well as proven violators of United Nations Global Compact principles, are also not eligible for inclusion. According to UBS, these exclusions are amongst the most comprehensive in the market and ensure that the fund is aligned with Article 8 of the EU’s Sustainable Finance Disclosure Regulation (SFDR).

The remaining index constituents are assigned ESG scores based on SAM’s ‘Corporate Sustainability Assessment’. This ESG score is calculated using either company-provided information or publicly available information.

The methodology includes firms with the highest ESG scores while targeting just 25% of the float-adjusted market capitalization of each Global Industry Classification Standard (GICS) industry group within the S&P 500. Constituents are weighted by float-adjusted market capitalization subject to an individual cap of 5%.

The index is reconstituted and rebalanced annually in April and makes use of buffer rules to limit unnecessary turnover – in practice, this means that constituents that dip below the threshold that would be required if the index were being constructed from scratch are not immediately replaced.

As of the beginning of the year, the resulting index contained 100 stocks and, by design, followed similar sector exposures compared to the S&P 500. There was a somewhat higher concentration in the largest names, however, with the top ten positions accounting for 38.3% of the index weight compared to 27.4% for the S&P 500.

The largest constituents were Microsoft (4.9%), Visa (4.8%), UnitedHealth (4.5%), Nvidia (4.3%), Mastercard (4.2%), Home Depot (3.8%), and Adobe (3.2%). Notable exclusions from the index were Apple, Amazon, Facebook, Tesla, Berkshire Hathaway, Johnson & Johnson, JP Morgan, Procter & Gamble, and Walt Disney.

According to S&P Dow Jones Indices, the ESG Elite index offers a notably enhanced sustainability profile compared to the S&P 500 with a 40% reduction in carbon footprint and a 57% pick-up in the overall ESG score.

Reid Steadman, Global Head of ESG Indices at S&P Dow Jones Indices, said: “We are very pleased to continue working with UBS Asset Management in expanding the S&P 500 ESG index ecosystem. Through our innovative indices, investors will be able to access investments that help build a sustainable future and meet the expectations of an evolving market.”

Listings

The fund has listed on SIX Swiss Exchange in US dollars (SPESGE SW), on Deutsche Börse Xetra in euros (AW1C GY), and on London Stock Exchange in pound sterling (S5EE LN). It is also available in several currency-hedged share classes including CHF-hedged (5ESGES SW) on SIX, EUR-hedged (AW1B GY) on Xetra, and GBP-hedged (S5EG LN) on LSE.

Interestingly, the SIX-listed US dollar share class comes with an expense ratio of 0.15%, while all other share classes cost 0.20%, leading to the rather uncommon situation where euro- and sterling-based investors will need to pay a small premium to trade the ETF in their currency.

The fund is the second ESG-tailored S&P 500 ETF from UBS, following from the UBS ETF S&P 500 ESG UCITS ETF (S5SF LN) which was introduced in April 2019. This fund has quickly found its footing, growing to $1.36 billion in assets under management and including over $820 million in net inflows in the past year. It is linked to the S&P 500 ESG Index which excludes tobacco and controversial weapons companies before selecting the firms with the highest ESG scores that make up 75% of the market cap of each GICS Industry Group. It comes with an expense ratio of 0.12% for unhedged share classes and 0.17% for hedged share classes.