This ETF is different from traditional ETFs. Traditional ETFs tell the public what assets they hold each day. This ETF will not. This may create additional risks for your investment. For example:
- You may have to pay more money to trade the ETF’s shares. This ETF will provide less information to traders, who tend to charge more for trades when they have less information.
- The price you pay to buy ETF shares on an exchange may not match the value of the ETF’s portfolio. The same is true when you sell shares. These price differences may be greater for this ETF compared to other ETFs because it provides less information to traders.
- These additional risks may be even greater in bad or uncertain market conditions.
- The ETF will publish on its website each day a “Proxy Portfolio” designed to help trading in shares of the ETF. While the Proxy Portfolio includes some of the ETF’s holdings, it is not the ETF’s actual portfolio.
The differences between this ETF and other ETFs may also have advantages. By keeping certain information about the ETF secret, this ETF may face less risk that other traders can predict or copy its investment strategy. This may improve the ETF’s performance. If other traders are able to copy or predict the ETF’s investment strategy, however, this may hurt the ETF’s performance. For additional information regarding the unique attributes and risks of the ETF, see the Principal Risks section of the prospectus.
For financial advisors with clients who have expressed interest in small and mid-cap investing, or hold environmental, social, and governance (ESG) considerations close to heart, Thrivent Asset Management has a unique ETF that might just pique their interest— Thrivent Small-Mid Cap ESG ETF (TSME).
"Thrivent, known for its history of active management in the mutual fund space, has introduced a unique ETF offering with TSME. This ETF is characterized by its adherence to ESG criteria, reflecting an effort to balance financial considerations with a focus on sustainability."
While the ESG aspect of TSME aligns the investment with social responsibility, this ETF also includes a focus on small and mid-cap stocks. Though not unique to Thrivent, targeting this sector is an attempt to explore growth potential and dynamism in these lesser-known companies, which can add diversity to a large-cap heavy, market-weighted portfolio.
The result? An investment opportunity that combines the higher risk and potential return dynamic offered by small-mid cap stocks, the security of ESG principles, and the expertise of Thrivent's active management team, which has a demonstrated track record of success in the mutual fund space.
A Comprehensive ESG Approach
TSME is designed to offer exposure to small and mid-sized companies with attractive fundamentals that have committed to sustainable business practices. It extends beyond traditional ETFs by incorporating a comprehensive ESG analysis into the fundamental research process to also prioritize small and mid-cap companies with a sustainable impact.
The portfolio selection for TSME is not merely dependent on a company's alignment with ESG standards but involves an in-depth, case-by-case analysis of each potential holding. Matt Finn, Head of Equities, and Chad Miller, Senior Portfolio Manager, strive for a holistic approach, ensuring the ETF comprises top-performing companies that address their material ESG issues effectively.
In managing the ETF, the integration of ESG standards adds a distinct perspective to the selection process. The criteria for stock analysis may become more complex, particularly in the small and mid-cap sectors where ESG research data may not be as extensive.
However, rather than limiting opportunities, this approach aims to identify investments that align with both financial objectives and sustainability considerations. This can lead to different investment choices compared to traditional SMID cap funds.
The Role of Active Management
Active management is at the heart of TSME, which Miller believes offers a significant advantage over passive ESG funds. Active management allows the Fund’s team to understand each holding from a complete 360-degree perspective, engaging in deep and meaningful conversations with the companies, beyond what the ESG reporting services reveal and analyst coverage of small and mid-caps provides.
TSME leverages the considerable experience and profound expertise of its investment team to curate a portfolio that encompasses approximately 60 small- and medium-sized stocks with a blend of both growth and value styles. These stocks, beyond their attractive fundamentals, must also demonstrate a commitment to ESG initiatives and sustainable business practices.
This active management approach positions the Fund to capitalize on market inefficiencies in the lesser covered small and mid-cap market segments. The team behind TSME can identify undervalued companies that are poised for growth and that are also meeting or exceeding ESG expectations. Active management gives TSME the flexibility to adjust holdings based on evolving ESG standards and corporate actions.
ESG Investing and TSME's Approach
The underlying philosophy of TSME's investment strategy is rooted in the belief that ESG considerations are integral to understanding both the risks and opportunities that may be material to companies' financial performance.
By focusing on ESG factors, TSME aims to pinpoint companies with proactive management teams that are capable of anticipating and adapting to shifts in technology, regulation, and market preferences. Such companies are seen as less likely to be blindsided by new environmental laws, social movements, or governance issues.
The approach of TSME isn't about social justice or political correctness; it's about recognizing well-managed, long-term sustainable companies. Those prioritizing environmental, social, and governance factors are considered to be more resilient and well-positioned to face risks and challenges.
ESG investing opens doors to new investment avenues that traditional financial analysis might overlook, such as innovators in renewable energy or companies with inclusive workplaces, potentially giving them a competitive edge.
Additionally, TSME's ESG strategy doesn't compromise on diversification. The investment universe is vast, with thousands of companies around the world possessing strong ESG credentials across various sectors. The portfolio can be as diverse, if not more so, than a non-ESG one, with the added consideration of long-term sustainability.
By embracing these principles, "TSME aims to align its financial objectives with broader societal needs and emerging trends, aiming to create a portfolio that reflects not just the current market landscape but also the evolving global context."
ESG and Portfolio Performance
The relationship between ESG investing and portfolio performance has been a topic of considerable interest and debate. Some argue that there might be a trade-off between focusing on ESG issues and achieving optimal financial performance. Others posit that ESG factors are a vital aspect of corporate performance and risk management, and therefore, can contribute to superior returns.
TSME adheres to the latter view, which sees ESG investing not as a sacrifice of returns but as a method of risk mitigation and potential performance enhancement. By identifying companies that not only have the potential to deliver robust financial performance but also demonstrate strong ESG practices, the Fund can create a portfolio that is positioned to deliver sustainable returns.
Miller suggests that the incorporation of ESG factors in building a portfolio may contribute to strong investment performance. This performance is due to the significant attention ESG topics receive from executives and boards of directors in shaping company strategies for the upcoming decade.
Moreover, there's a growing recognition that companies with strong ESG practices may have a strategic edge. These companies often operate more efficiently, innovate more effectively, and face fewer regulatory and legal issues, all of which can contribute to better financial performance.
Thrivent believes that companies proficient at serving their primary stakeholders, such as employees, are more likely to attain long-term success, thus offering attractive return potential. The thesis is that an in-depth analysis of material ESG topics offers crucial insights into a company's long-term viability and financial outcomes.
To substantiate this, evidence demonstrates that companies that prioritize their employees yield a 2% to 2.7% greater excess return annually [1]. Furthermore, there's a notable 3-8% annualized alpha difference between companies that exhibit strong performance on material sustainability issues versus those that do not [2]. Sustainability practices, in particular, have been shown to lower the cost of capital, with 80% of studies confirming this finding for companies with robust sustainability practices [3].
TSME ETF: Conclusion
TSME is a purposeful blending of small and mid-cap assets in an ESG framework, managed by the experienced team at Thrivent. This combination offers a unique investment opportunity, prioritizing both sustainable impact and competitive returns.
This content was originally published by our partners at ETF Central.