ETF Democratization Continues

It is getting easier for investors to manage sector weightings.

This week's Barron's did a deep dive on ESG investing. If you're new to the concept, E stands for environment, S for social and G for governance. You also see the term sustainable and sometimes impact used interchangeably with ESG. On of the articles was titled Getting Started in Sustainable Investing and it looked at quite a few investment options including the iShares MSCI Global Impact ETF (MPCT). As the name implies, it is a global equity fund. The short version is that fund owns companies that "address at least one of the world's major social and environmental challenges as identified by the United Nations Sustainable Development Goals."

For purposes of this post I won't address ESG, for now I will focus on MPCT as a broad based fund with a different composition than market cap weighting, it looks different than a fund like iShares MSCI All Country World ETF (ACWI) in terms of sector weight, country weighting and there are some notable differences among the top holdings.

MPCT has 31% in the US versus 53% in ACWI. MPCT then has mid to low teen weightings in three countries where the second largest country weighting in ACWI is Japan at 8%. At the sector level healthcare, industrials and consumer staples all have about 20% weightings while tech has only a 13% weighting and financials have no weighting. In ACWI, financials have a 21% weighting and tech a 19% weighting. A smaller difference is that MPCT has essentially no energy versus almost 7% for ACWI. MPCT has a noticeably lower PE ratio than ACWI and a slightly higher dividend yield. The PE might be lower for simply having less tech and no Amazon (AMZN).

If you play around with a chart comparing the two you will see that more often than not MPCT lags ACWI perhaps because of less tech and no Amazon. That certainly is plausible. Tech now comprises more than 25% of the S&P 500 which I have said many times is at the very least a flashing yellow caution light. I don't keep tabs on tech's weighting in the All Country World Index but it is a good bet that it is elevated in that index as it is elevated in the S&P 500. If something terrible happens in tech as some predict then it makes sense to think that a broad based fund that is light in tech, as MPCT is, would hold up better.

The other day I posted about a portfolio that I constructed using just broad based products for the equity sleeve. I talked about the need to look through to the holdings and do the math on the larger sector weightings to understand risks taken by being unintentionally overweight. That portfolio had about a 30% tech weighting within the equity sleeve, 7.5% in the overall portfolio. Incidentally, having talked with Mike Venuto about Toroso's All Weather Portfolio Plus after he read the post, he sent more detail and All Weather has 9% in tech.

Blending together ETFs is something I write about all the time and the potential utility of MPCT if you use broad based funds is simply another example.

In a similar fashion ProShares offers four ETFs that track the S&P 500 excluding one sector. There are four; S&P 500 ex financials, ex tech, ex healthcare and ex energy. As a very simplistic example, 75% in ProShares S&P 500 Ex-Technology (SPXT) and 25% in any single or combination of tech proxies would be a sector neutral exposure but maybe allows for growthier tech exposure like to an industry or niche within tech or maybe as a way to avoid the mega cap tech if that interests you.

This is the sort of thing I have been doing for clients with narrow based product the entire time I've managed money. It is no less important a strategy for risk management for do it yourselfers but being able to just use broad based funds is sort of a game changer if, as a do it yourselfer, you don't want managing your portfolio to be a full time endeavor.

When you read or hear about ETFs being democratizing forces, this sort of thing is exactly what they mean. It's been obvious since before the Random Roger site came along and it continues to evolve.

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