It seems like "climate action" is the preferred label these days for what used to be branded as a so-called environmentally and socially responsible, "ESG" portfolio. New exchange-traded fund issuer and investment management firm Veridien Global Investors made its debut in the ETF market recently with the launch of the Veridien Climate Action ETF (CLIA) . When I say new, the firm opened its doors on April 6 based on the most recently filed Form ADV, and while it states a $50 million minimum account size, has reported assets under management of just over $704,000 as of March 1. The principals are tenured managers, so I have no doubt they will have no problem attracting accounts.
Before we get to the fund and its security selection process, I'd like to mention one thing. If you follow the link to the fund's website, you'll notice that there is a large splash screen that warns visitors that "This ETF is different from traditional ETFs." The warning talks about how the fund "will provide less information to traders" and that the reason is that the firm wants to limit or eliminate other traders' ability to front-run the fund. As we've seen with other funds I've reviewed recently, this fund falls into the so-called Active Non-Transparent (ANT) group of ETF products. Veridien has licensed ActiveShares technology from provider Precidian Investments. You may recall from other reviews that ActiveShares employs a process in which the full and complete portfolio is not revealed to anyone, even market markets or authorized participants. Creation and redemption activity is conducted through a single gatekeeper which takes in cash from market participants and handles all share basket transactions on its own. In order to provide markets with a reliable source to value the portfolio the process includes not one, but two intraday indicative value calculations (VIIV) which are described more fully in this methodology.
Now that we know a little about the issuer and how the fund is going to function, let's take a look at the fund positioning and how the portfolio managers intend to provide that exposure.
The CLIA fund sports an 85-basis point (bps) expense ratio, so anyone investing $1,000 over a calendar year would see $8.50 of the principal go to fees. For reference, this lands almost in the middle of the firm's stated fee range of 65 to 100 bps as reported in the firm's Form ADV Part 2A.
The fund is actively managed so the prospectus will tell us what we need to know about security selection.
Per the prospectus, analysts start with the complete universe of equity securities including American Depository Receipts (ADRs) of companies " whose activities, business models, or products make a substantial contribution to mitigating climate change." The list of acceptable activities includes conservation forestry, wetlands restoration, a variety of renewable energy technologies and services, battery manufacturing, rail infrastructure providers, what is described as "data-driven" ways to reduce greenhouse gas (GHG) emissions and "professional services related to the energy performance of buildings." Analysts augment third-party environmental, social, and governance (ESG) data vendor-supplied ratings with their own proprietary research to arrive at a final rating.
From there, analysis is performed to categorize revenue, capital expenditures, and operating expenses into eligible categories. Once these figures have been produced, any company that either generates half of revenues or incurs half of capital expenditures or operating expenditures on activities related to mitigating climate change makes the cut.
Then, analysts undertake traditional fundamental and technical (price) analyses to determine a company's overall attractiveness and expected price target. The final step is to take the list of best names and allocate them across the portfolio. While the fund is an all-capitalization portfolio, the aggregate weight of all names with a market capitalization of less than $300 million is capped at 10%.
Wrap It Up
As with any new, actively managed fund, I can't make any recommendations here. There is a list of the top 10 holdings on the website, which is populated with familiar names, like Tesla (TSLA) , AES Corp (AES) , and Enphase Energy (ENPH) . There are also names like Flour (FLR) and Corning (CO) , which make it on the firm's 50% threshold, but would not, given a higher exposure threshold. As for the rest of the holdings, you will have to wait, per the Statement of Additional Information (SAI) page 17, a full 60 days after the end of each quarter to find out what the portfolio positioning was at the end of that quarter.
A traditional mutual fund holder might be interested in a product like this, if only for the ability to trade shares intraday or implement option-based hedging or income strategies once contracts become available to trade but ETF veterans might balk at the lack of transparency. Overall, funds with this type of structure have yet to grab significant assets in the ETF industry but as for the effectiveness of these managers, only time will tell. I'll add it to the watchlist and follow up once we've seen some results.