If you've ever played a team sport, or even if you've only watched sports, you may understand that there are teams that end up being greater than the sum of their parts. While that formula starts with talented players, it is almost always completed by a coach or coaching staff that is able to bring the players together and shape them into a high functioning team. Coaches do this by providing players with an environment where players feel like they are truly part of the team and are motivated not by a coach's direction, but rather, by their own internal drive to succeed and in turn make the team successful.
Last year I wrote about a fund launch that started what is becoming a series of funds launched by issuer Harbor Capital. These funds focus on the idea that a strong corporate culture as measured by what research firm Irrational Capital identifies as the Human Capital Factor can be a source of alpha for equity investors. Let's take a look at how the Harbor Corporate Culture Leaders ETF (HAPY) has been doing since its launch and what other funds have followed, including the latest addition to the family, the Harbor Corporate Culture Small Cap ETF (HAPS) .
The Human Capital Factor at Work
As you can see from the below table, this particular pudding seems to deliver some proof, at least since the launch of the second fund in the series, the Harbor Corporate Culture ETF (HAPI) on Oct. 13, 2022.
Source: Factset, All You Can ETF LLC
Since the first fund, HAPY, launched, either Harbor or Irrational Capital has partnered with the Canadian Imperial Bank of Commerce (CIBC) on the indexes that underly the second fund, HAPI, and the new Harbor Corporate Culture Small Cap ETF. This fund sports a 64-basis point expense ratio so investing $1,000 over a calendar year would see $6.40 of that principle go to fees.
The index is provided by CIBC but calculated by Solactive. While I couldn't find an index methodology guide for HAPS like I was able to for HAPI, the fund prospectus for HAPS does a good job explaining the process. Neither document brought any big surprises as the scoring and ranking for HAPS is the same underlying methodology as what is used for HAPY and HAPI. What is different from the original HAPY is that portfolio sector weights are set to match the sector weights of the initial security selection universe, which in this case is Solactive's version of the Russell 2000, and in the case of HAPI, the Solactive version of the S&P 500. The interesting thing to me is that if there aren't enough names to fill out the allocation to a particular sector, the index will fill that allocation with one of the SPDR Sector ETFs. This policy has been set for HAPI and HAPS but isn't part of the original HAPY.
Wrap It Up
This overall approach is one that makes sense to me. There are folks who will look at this approach and distrust it, because of the feeling that the selection criteria are too subjective but my take is that they should spend some time at Irrational Capital's website and take a deeper dive into their methodology. CIBC also has a podcast/interview with Irrational Capital's Dan Ariely that gets into the approach as well. If what I wrote at the beginning of this article resonates with you at all, then these funds might be worth taking a closer look at.
