A return to 60/40 balance? [PODCAST]
This strategy fell out of favor, but it may be poised for a return.
This strategy fell out of favor, but it may be poised for a return.
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:
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.
Even with thousands of exchange traded funds (ETFs) on the market, Thrivent Small-Mid Cap ESG ETF (TSME) offers a compelling combination of features that provide an alternative to the universe of ETFs currently available.
“The Fund combines Thrivent’s expertise in the small and mid-cap actively managed space with a proprietary environmental, social and governance (ESG) analysis process,” explained Chad Miller, Thrivent Small-Mid Cap ESG ETF Senior Portfolio Manager. “We combine that with our bottom-up fundamental research process, complemented by engagement, to provide what we believe represents a unique offering in the marketplace.”
The Fund celebrated its one-year inception anniversary on October 5, 2023, with a 5.46% year-over-year return, exceeding the 1.93% return of its Russell 2500 TR USD Index benchmark. View the most recent TSME performance details.
Miller, along with lead portfolio manager Matt Finn, limits the portfolio to a select mix of about 40 to 60 small- and medium-sized companies with attractive valuations that have demonstrated a commitment to ESG initiatives and furthering sustainable business practices.
Thrivent Small-Mid Cap ESG ETF focuses on high-quality stocks in the small and mid-cap sectors, offering investors an opportunity to participate in this dynamic market segment of up-and-coming companies. While small and mid-cap equities haven’t kept up with large-cap equities recently, historically they have often delivered outperformance over large-cap U.S. equities.
One of the key advantages of combining small and mid-cap stocks into a single fund is that as great small companies grow and graduate into the mid-cap category, the Fund can retain them in the portfolio to continue to tap into their potential growth.
Thrivent’s experience in managing small and mid-cap funds played into the decision to launch the ETF in October 2022. “Thrivent has a demonstrated expertise in this category,” Miller said. “We have a number of very strong performing funds across the small and mid-cap space. We’re able to leverage the unique experience and knowledge that our investment team brings to the table—from our deep pool of investment analysts to our portfolio management teams.”
Miller believes that small and mid-sized companies in the ESG sweet spot offer the potential for a sustained, long-term runway. “These companies that are addressing some of the largest challenges developing in our society today have the opportunity to become very large companies at some point in the future.”
The Fund maintains a portfolio of small and mid-cap stocks that meet criteria for environmental, social, and (corporate) governance practices.
“We know our clients care deeply about the causes they support, the communities they live in, and the people who are important to them in their lives—their family and friends,” noted Miller. “We also know our clients expect an attractive financial return. We aim to achieve both with this strategy.
“In our view, companies that manage to material ESG issues, who take care of their employees and invest in developing a strong culture—giving their employees the opportunity for training and advancement—and encourage strong ethics, as well as managing sustainable business practices, have greater potential to outperform their peers.”
The Fund takes a holistic approach to ESG investment management. “We're not focused on any one issue, but rather on how companies are performing across the broader bucket of environmental, social and governance, as well as the individual issues that fall under each of these categories,” Miller explained. “We really want to see companies that have a long-term approach to addressing these challenges in their businesses to successfully serve their stakeholders.”
In its process, the Fund considers each company’s strategy to successfully and sustainably serve all primary stakeholders, with special emphasis on the environment, employees, customers, suppliers, the community, and corporate governance. “Companies that effectively serve primary stakeholders have the potential to create a competitive advantage that is very hard to replicate,” Miller said. “When we find companies that can do this, it gives us more confidence in our long-term fundamental forecasts.”
Miller is particularly interested in companies that integrate ESG practices as part of their long-term growth and profitability strategy, rather than merely to improve their ESG rating.
“For these companies, this is not a distraction or a sideshow that somehow detracts from the overall company mission and the operating results of that company, but rather it furthers their mission and their purpose in the world,” Miller stressed. “Those are the companies that are doing their best in human capital standards or setting aggressive environmental targets because it feeds into the core vision of what they believe is the future path of that company.”
“On top of this, we integrate our ESG process with the key tenant of engagement with these companies,” he added. “As a long-term investor, we are able to establish ourselves as partners with these companies and engage in discussions that really get to the long-term principles of where they're headed as a company, specifically as it relates to ESG and sustainability.”
The Fund management team evaluates prospective holdings under the lens of the third-party ESG materiality framework from the Sustainability Accounting Standards Board (SASB). SASB has worked with stakeholders in various industries to help identify the most financially material ESG issues by industry. The Fund also screens out all companies that receive a CCC rating, which is the lowest category in the MSCI ESG rankings.
For example, on environmental issues, Miller explains that “we're focused on how companies are impacting the natural environment and their strategies to reduce this impact over time. For instance, we're looking for companies that can create emissions as efficiently as possible in the short- to medium-term, and then ultimately reduce those over the long term. We're looking for companies that have a strategy to solve water scarcity challenges, consider biodiversity impacts, and then also invest in circular business models that create great efficiencies for the environment, as well as the individual companies.”
Unlike the vast majority of ETFs, which are passively managed, the Fund is actively managed, relying on Thrivent’s team of experienced small and mid-cap analysts and portfolio managers.
“As an actively managed ESG ETF, we believe we have an advantage over passively managed ESG funds because we can actively engage with the companies on their key areas of impact,” Miller said. “We have a number of different resources to help us analyze and understand the areas that we're looking into and their ultimate ramifications on stakeholders.”
While many passive ETFs may own 300 to 500 equity holdings, the Fund can take a selective approach, limiting its holdings to a relatively small selection of ESG focused small and mid-cap stocks that offer the best potential for long-term growth. “We're really looking for the top 40 to 60 companies that are doing a good job of addressing these material ESG issues across their business,” Miller said.
“We believe our advantage relative to passive ESG funds is our ability to understand these issues from a complete 360-degree perspective, to see what their customers, their employees and other stakeholders are saying, and then also to engage with the individual companies and talk through what they're doing, what they're seeing, and how they are managing these issues in their business. Those elements of analyzing their operations and then engaging with the companies to try and understand what's really happening on the ground, we believe, gives us an advantage over traditional ESG index funds.”
The easiest way to think about an ETF is that it's similar to a mutual fund, but it comes with four primary advantages:
Securities markets generally tend to move in cycles with periods when security prices rise and periods when security prices decline. The Fund’s value is influenced by a number of factors, including the performance of the broader market, and risks specific to the Fund’s asset classes, investment styles, and issuers. ESG strategies may result in investment returns that may be lower than if decisions were based solely on investment considerations. Because ESG criteria exclude certain securities for non-investment reasons, investors may forgo some market opportunities available to those who do not screen for ESG attributes. The Adviser’s assessment of investments may prove incorrect, resulting in losses, poor performance, or failure to achieve ESG objectives. Small and mid-sized companies often have greater price volatility, lower trading volume, and less liquidity than larger, more established companies. The Fund is newly formed and has a limited operating history. Transactions in shares of ETFs may result in brokerage commissions, which will reduce returns. These and other risks are described in the prospectus.