An LGBTQ equality fund’s liquidation and the future of social criteria

When it launched last year, the LGBTQ + ESG100 ETF gained notice for the issuer’s big-name board members and the fund’s use of an index tied to a survey of LGBTQ households. Less than a year later, though, issuer LGBTQ Loyalty Holdings has liquidated the fund.

The demise of its ETF and the struggles of a sponsor that attracted tennis legend Martina Navratilova and former U.S. Rep. Barney Frank to its board represents only the latest illustration of what financial advisors and other experts say is a very difficult market for startups, regardless of a fund’s mission or investing strategy. More than three dozen other ETFs have closed this year as well. Near the end of Pride Month, the shutdown of the fund is offering advisors, clients and ESG practitioners a lesson about other available means of aligning portfolios with social goals and the sheer cost of starting an ETF from scratch.

Annual expenses could reach $250,000 to $275,000 for legal, compliance and trading costs alone, without even including marketing, according to Wes Gray, founder of asset manager and ETF service provider Alpha Architect. Gray’s firm has cut the cost to $200,000 to $225,000, with a goal of reducing it to $175,000 eventually, he said. Still, a fund like the LGBTQ ETF would need to attract about $50 million in assets under management “just to break even,” Gray said.

“It’s a very challenging business,” he said. “That’s why the iShares of the world dominate, because they've got trillions of dollars, and they love to be able to spend money because they know that keeps the competition out.”

ESG

How the ESG industrial complex blurs the lines for do-good investors

June 8, 2022 12:07 PM

Indeed, the issuer of the LGBTQ ETF, a financial data company that developed the index used as part of the fund’s methodology two years earlier, hasn’t garnered much in the way of financial results, according to its public filings. As of the end of the first quarter, the company has sustained $20.6 million in losses and has “negative working capital” of more than $6.8 million, its latest quarterly report shows.

“Our goal is to accelerate our revenue pursuits through our partnership and licensed relationships to achieve a break-even point when we have secured AUM benchmarked against the LGBTQ100 Index in excess of $50 million,” according to the report. “We have achieved no revenues to date from our LGBTQ related operations and have been focused on building our product and achieving performance results and media branding over the course of the past twelve months. There are no assurances that can be given that we will achieve revenues or profitability in the future.”

Representatives for the company declined to comment about the shutdown of the fund and future plans beyond the public filings and statements available in the press release about the fund’s liquidation.

“As the sponsor of the fund, the long-term sustainability to secure assets under management has to be our primary focus,” LGBTQ Loyalty board member Larry Roan said in a statement. “We anticipate that as the LGBTQ100 ESG Index creator and sponsor, we will file a prospectus with the SEC imminently with a new fund advisor proposed.”

ProcureAM, the advisor to the liquidated product, didn’t make any executives available to discuss the fund, either. 

“The sponsor was no longer willing to support the fund,” spokeswoman Kathleen Elicker said in a statement. “As such, the trust board deemed it was in the best interest to liquidate the fund.”

ESG

5 questions for Martina Navratilova about investing in LGBTQ equality

August 25, 2021 11:00 AM

Not every startup ETF that invests with social or political goals in mind has suffered that fate, though. For example, the Freedom 100 Emerging Markets ETF has drawn $200 million in AUM since its May 2019 inception. The fund is a client of Alpha Architect and tied to an index aimed at “a freedom-weighted emerging markets equity strategy” launched by manager Perth Tolle’s Life + Liberty Indexes. 

Another relatively new fund, the Adasina Social Justice All Cap Global ETF, amassed $82 million in its first year after Adasina Social Capital co-founders Rachel Robasciotti and Maya Philipson created a product tied to a criteria stemming from “working closely with social justice movements to identify the issues most directly affecting their communities.” The fund started with a base of clients who were using a strategy designed that way at the pair’s former wealth practice, and each of the three managers have built large followings among industry professionals after frequent media and conference appearances.

Managers can tap into other methods besides pooled investment vehicles as well. Sloane Ortel launched Invest Vegan last year as a separate account manager that’s accessible through Charles Schwab’s platforms and helping to change the definition of “alternative” investing. Invest Vegan’s screens exclude S&P 500 stocks based on companies’ involvement with animal products, human rights violations, fossil fuels and harmful workforce practices. 

About 25 households are using the firm’s strategy through a way of building scale that Ortel says is “sleepier” and “less glamorous” than creating a separate fund. It often takes $100 million or even $250 million in AUM, plus a track record, to gain access to large wealth managers’ platforms as a startup ETF, she points out, citing the high overhead costs and competition.

“If you want to differentiate yourself, you have to do active management,” Ortel said. “That is a very, very high bar for an asset management business and one that many businesses never reach. It’s unfortunate that so much of the new ESG product creation has been following that model because it's quite meaningfully distinct from what you need to build a franchise. I don't know how you can build an asset management franchise if you can't say to your clients that you're going to be around for the next five years.”

Fintech

Why alts should stop getting the fringe treatment

June 27, 2022 12:22 PM

At an expense ratio of 75 basis points with large-cap stock holdings that would be available already through passive funds, the LGBTQ ETF faced challenges from its inception last year. In addition, the methodology “really focused on getting rid of the bad apples but not necessarily rewarding the best actors,” said planner Lindsey Young of Baltimore-based Quiet Wealth. The fund screened out the companies that performed the worst on the poll of LGBTQ Americans’ brand preferences, then achieved diversification by including other top 1000 companies that had the most positive general ESG ratings. Young wrote a blog last year concluding that the ETF “could be a small piece of some investors’ equity portfolios, but should not be a core holding.”

Young sees greater potential for investing in LGBTQ equality by seeking out other ETFs with methodology that’s more focused on companies that perform best on social metrics specifically or rewarding the best actors through rapidly expanding direct indexing technology, she said.

“That obviously is going to be a huge trend,” Young said. “Consumers and advisors are going to have a lot more power to create customized portfolios, including filtering for supporting LGBTQ rights.”