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An ETF That Has America’s Values in Mind Can Also Outperform

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This article was originally published on ETFTrends.com.

Socially responsible ETFs that follow environmental, social and governance principles are more than just a feel-good investment strategy. They also produce results.

“Companies and investors looking to gain an edge in today’s market should take a cue from the priorities of the American public,” Martin Whittaker, Chief Executive Officer of JUST Capital, said in a note. “A thoughtful, principled approach to business isn’t just the right thing to do – it makes good business sense.”

According to JUST Capital research, U.S. companies that try to uphold worker pay and treatment, customer experience, beneficial products, environmental impact, community support, job growth, and ethical leadership have cumulatively outperformed the Russell 1000 by 456 basis points, or 215 bp annualized, from November 2016 to September 2018.

The report analyzed companies in the JUST U.S. Large Cap Diversified Index , which acts as the underlying benchmark for the Goldman Sachs JUST U.S. Large Cap Equity ETF (JUST) , is based on the Russell 1000 benchmark and targets companies that score well on environmental, social and governance metrics.

To screen for its ESG-focused components, Just Capital conducts an annual survey taken from the American public and analyzes 120,000 data points across 85 unique metrics to score companies based on how they perform on key issues prioritized by the public. For instance, companies are ranked from worker issues, like providing a living wage and workplace safety; to customer concerns, such as privacy protection and truthful advertising; to environmental impacts, including minimizing pollution and resource efficiency. Companies are ranked by overall score, and the top 50% are selected and weighted by market cap.

The indexing methodology hopes to capitalize on the fact that companies found in the socially responsible index historically pay better, create more jobs, pay fewer fines, give twice as much to charity, emit less greenhouse gas, and have higher return on equity, compared with the rest of the Russell 1000.

JUST Capital discovered three specific ways companies can improve worker treatment while maximizing profit, pointing to policies implemented by 3M, Texas Instruments, PepsiCo, and among other. The research found that employers that promote work-life balance, provide career development opportunities, and implement anti-discrimination measures consistently generate higher returns-on-equity than their peers, regardless of industry.

JUST Capital also found that 83% of the benchmark index’s financial outperformance can be attributed to alpha even after controlling for common investment factors like profitability, investment, value, size, growth, and momentum.

“Undiscovered alpha is bit like finding $100 on a Wall Street sidewalk,” Hernando Cortina, Director of Indexes and Analytics at JUST Capital, said in a note. “People assume it couldn’t possibly be there – but the American public seems to have hit on a compelling source that’s been hiding in plain sight and well worth deeper exploration.”

For more information on ESG-related investments, visit our socially responsible ETFs category.

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