ETF Trends CEO Tom Lydon discussed the Schwab Ariel ESG ETF (SAEF) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.
A recently launched fund, SAEF is an active, semi-transparent (also known as non-transparent) ETF that invests in small- and mid-cap stocks that have been screened based on environmental, social, and governance (ESG) factors.
Schwab Asset Management launched SAEF, with Ariel Investments, LLC, acting as sub-advisor to the fund. Schwab is delivering a fund managed by two leading firms with unparalleled ESG and ETF capabilities by collaborating with Ariel. This offers investors access to value-oriented, small- and mid-cap U.S. equities with rigorous ESG screening and deep fundamental analysis. The two have a collaborative relationship spanning 20+ years, starting with the Ariel-Schwab Black Investor Survey, first completed in 1998.
Ariel was the first African American-owned asset management firm in the U.S. The firm brings nearly 40 years of experience integrating ESG factors into every phase of its investment process. It utilizes the Ariel-Schwab Black Investor Survey: a body of research exploring the similarities and differences between Black and white Americans regarding saving, investing, and other financial priorities.
Ariel considers multiple factors versus relying solely on third-party ESG rating systems or historical company metrics. These strategies rely exclusively on third-party rating systems or historical company data that may not provide the same opportunities as an actively managed ESG approach. Ariel consistently engages with portfolio company management teams to address ESG issues deemed material to long-term financial health. Proprietary ESG risk ratings are informed by assessments of industry exposure, disclosure, and management of material ESG issues. Read more about this collaboration in a recent ETF Trends interview.
Small- and mid-cap inefficiencies open up opportunities in active management. As it relates to active SMID-cap ESG approaches, inefficient asset classes provide an opportunity to add value given the fact that small- and mid-cap stocks are not widely covered by sell-side firms.
Active Semi-Transparent ETF Structure
Traditional ETFs tell the public what assets they hold each day. The cons of this include the concern that this may create additional risks for your investment. This fund will not take part in this practice, but will instead provide less information to traders, who tend to charge more for trades when they have less information. The price paid to buy fund shares on an exchange may not match the value of the fund’s portfolio. The same is true when selling shares.
These price differences may be greater for this fund than other ETFs because they provide less information to traders. These additional risks may be even greater in bad or uncertain market conditions. The ETF will publish on its website each day a “Proxy Portfolio” designed to help trading in shares of the ETF. While the Proxy Portfolio includes some of the ETF’s holdings, it is not the ETF’s actual portfolio.
On the other hand, the differences between this fund and other ETFs may also have advantages. By keeping certain information about the fund secret, SAEF may face less risk that other traders can predict or copy its investment strategy. This may improve the fund’s performance. However, if other traders can copy or predict the fund’s investment strategy, this may hurt the fund’s performance.
Listen to the Full Podcast Episode on SAEF:
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