This ESG-focused ETF offers a unique blend of features to small- and mid-cap investors.
Coming up, we introduce you to Thrivent’s first-ever ETF.
From Thrivent Asset Management, welcome to episode 38 of Advisor’s Market360™. A podcast for you, the driven financial advisor.
Offering a unique combination of features, Thrivent Small-Mid Cap ESG ETF is a compelling option in the growing universe of exchange traded funds, or ETFs.
Using the ticker symbol TSME, this ETF is the first offered by Thrivent and is available on the New York Stock Exchange Arca. We caught up with Chad Miller, the Associate Portfolio Manager for the new ETF to get an overview of the Fund:
“The Thrivent Small-Mid Cap ESG ETF is an actively-managed product that invests in small- and medium-sized companies who have a demonstrated commitment to ESG initiatives and furthering sustainable business practices. And when we combine our fundamental research with our ESG research in our investment process, we're left with a portfolio of companies that has a strategy to outperform the benchmark and also further ESG initiatives and sustainable business practices.”
As a quick reminder, ESG stands for environmental, social and governance, a designation that refers to a set of standards for a company's behavior used by socially conscious investors to screen potential investments. 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. It’s important to remember that U.S. small- and mid-size equities have often outperformed U.S. large-cap equities.
One of the key advantages of combining small- and mid-cap stocks into a single fund is that, as 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 also played into the decision to launch an ETF that features both categories. Miller explains:
“We focus on small- and mid-sized companies in this Fund because we have a number of very strong performing funds across the small- and mid-cap space. And so, we're able to leverage the unique experience and knowledge that our investment team brings to the table. On top of this, we integrate our ESG process with the key tenant being engagement with the companies.”
Miller believes that small and mid-sized companies with a commitment to ESG practices have great potential…
“We believe that small- and mid-sized companies offer a very long runway for financial success as they are helping solve some of our biggest challenges today, both from the environmental perspective as well as other issues that they can help. This runway by that definition is long and broad. So those companies who can feed into being a part of the solution into the future have the opportunity to become extremely large companies at some point in the future.”
The Fund will maintain a portfolio of small- and mid-cap stocks that meet certain criteria for environmental, social, and governance practices.
“We know that our clients care deeply about purpose and positive impact they're having on the causes they support. These are charities, this is their communities, their family and friends. We also know that our clients expect an attractive financial return. We've combined the element of purpose and positive impact, and ultimately, we attach this to a goal of generating a strong financial return to this purpose-driven approach.”
Miller provided further context about what types of companies they look for to be part of the Fund:
“So, in order to identify ESG opportunities, we rely on our stakeholder analysis process. And it's our belief that those companies who can sustainably and successfully serve the primary stakeholders in their business ecosystem are better positioned than most to achieve attractive financial results into the future. Typically, we define six primary stakeholders that each company needs to successfully serve. Those being the environment, their employees, their customers, their suppliers, the communities they operate in, and then having effective corporate governance over the top.”
The Fund management team evaluates prospective holdings under the lens of the third-party ESG materiality framework from the Sustainability Accounting Standards Board, which has worked with stakeholders in various industries to help identify the most financially material ESG issues by industry.
Unlike the vast majority of ETFs that are passively managed, Thrivent Small-Mid Cap ESG ETF is actively managed, relying on the expertise of Thrivent’s team of experienced small- and mid-cap analysts and portfolio managers.
“As an actively managed ESG fund, we have an advantage over a passively managed ESG fund because we can actively engage and consider the various topics. We have a number of different resources to help us analyze and understand the topics 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 50 or so companies that are doing a good job of addressing this material ESG issues across their business. And so, an advantage we believe we have, as opposed to a traditional ESG index fund, is we have the ability to look at an issue from all different angles. We can go in and see what the company is saying, we can go in and see what their customers, what their employees and other stakeholders are saying and try and use that context to make a determination of, in this specific situation, what is the best thing a company can do to address this issue?”
Thanks to Chad Miller for the introduction to the Fund. Before we wrap up, let’s review the benefits of ETFs as compared to mutual funds.
As you know, mutual funds typically provide investors with the benefit of diversification and professional management. ETFs are similar to mutual funds but offer some additional benefits for individual investors. These are four potential primary advantages:
One, ETFs may reduce investors’ tax burden through a more efficient tax structure.
Two, ETFs offer increased liquidity, with the ability to trade in the ETFs throughout the day, as opposed to just at the close of trading like a traditional mutual fund.
Three, because of the way ETFs are structured and managed, they typically come with lower costs.
And four, they may have no investment minimums, making it easy to own an ETF.
These advantages may contribute to increasing investor demand for ETFs.
Thanks for listening to this episode of Advisor’s Market360™. All episodes are available on Apple Podcasts, Spotify, and Google Podcasts. Email us at email@example.com with your feedback, questions and topic suggestions for future episodes. If you’re a financial advisor and have a story you’d like featured in a future episode, we’d like to hear it! You can also learn more about us at thriventfunds.com and find other insights of interest to you, the driven financial advisor. Bye for now.
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: first, 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. Second, 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. Third, these additional risks may be even greater in bad or uncertain market conditions. Fourth, 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.
Additionally, the ETF is newly formed and does not have any operating history. Small and medium-sized companies often have greater price volatility, lower trading volume, and less liquidity than larger, more established companies. 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. Markets may also be impacted by domestic or global events, including public health threats, terrorism, natural disasters or similar events. 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 and products for non-financial reasons, investors may forego some market opportunities available to those who do not use these criteria. ETFs trade like stocks, are subject to investment risk, and will fluctuate in market value. Unlike mutual funds, ETF shares are not individually redeemable directly with the Fund, and are bought and sold on the secondary market at market price, which may be higher or lower than the ETF's net asset value, or NAV. Transactions in shares of ETFs will result in brokerage commissions, which will reduce returns. Investors also may incur the cost of the spread between the price at which a dealer will buy shares and the somewhat higher price at which a dealer will sell shares. The Adviser's assessment of investments and ESG considerations may prove incorrect, resulting in losses, poor performance, or failure to achieve ESG objectives. The Adviser is also subject to actual or potential conflicts of interest.
For more detailed information about taxes, consult your tax attorney or accountant for advice.
The views expressed are as of October 4, 2022, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. The commentary should not be considered as investment advice or a recommendation of any particular security, strategy, or product.
The concepts in this presentation are intended for educational purposes only. They may not be suitable for your clients’ particular situation. The suitability of any specific product or strategy will be dependent upon your clients’ particular situation.
Investing involves risks, including the possible loss of principal. The prospectus and summary prospectus contain more complete information on the investment objectives, risks, charges and expenses of the fund, and other information, which investors should read and consider carefully before investing. Prospectuses and summary prospectuses are available at thriventETFs.com.
ALPS Distributors, Inc. is the distributor for Thrivent ETF Trust. Thrivent Distributors, LLC is a marketing agent. Thrivent Asset Management, LLC, an SEC-registered investment adviser, serves as the investment adviser for the Thrivent ETF Trust. Thrivent Distributors, LLC and Thrivent Asset Management, LLC are subsidiaries of Thrivent, the marketing name for Thrivent Financial for Lutherans. ALPS Distributors, Inc. is not affiliated with Thrivent or any of its subsidiaries.