A message from your XYIS Investment Committee:
As you know, we take our fiduciary responsibility to you and your clients very seriously. As such, we continuously seek ways to improve the portfolios and other aspects of XY Investment Solutions. A recent in-depth analysis will result in some changes to the Cause NTF models which will take effect the week of August 5, 2019. If you feel that any of your clients’ (taxable) accounts will be negatively affected by these changes, please reach out to the XYIS team to help mitigate the impact as soon as possible prior to 8/5.
The recent expansion of TD Ameritrade’s No Transaction Fee ETF list afforded us a great opportunity to review the Cause NTF model portfolio. Previously, only a handful of higher-cost, actively-managed mutual funds were available for us to build a prudent portfolio representative of our investment philosophy. While the current Cause NTF portfolio exhibits attractive ESG attributes, evidenced by the MSCI ESG Quality score (learn more about the score here), it does so at a significant cost; namely about a 55bps higher annual expense ratio versus the XYIS Core model (as a baseline).
Among the ETFs added to the TD NTF list in June were a number of iShares and Nuveen ESG ETFs. Upon comparing their methodology, we are comfortable with both, but generally favor Nuveen’s approach:
- There are four pillars of Nuveen’s optimization process: ESG Quality Score (mentioned above) in addition to Controversy Score, Controversial Business Involvement, and a Low Carbon criteria.
- iShares does not utilize a low carbon criteria in their optimization process. As a result, they have a fairly high carbon intensity compared to Nuveen’s ETFs, holding names like Exxon Mobil, Chevron and Conoco Phillips, which are screened out of Nuveen.
- iShares does not sector-neutralize – where Nuveen includes companies that are in the top 50% of ESG scores for their given sector, iShares optimizes on ESG score.
After multiple rounds of analysis and discussion, we decided on the following changes to the Equity portion of the model, which will reduce its expense ratio from 84 bps to 66 bps.
- Reduce the equity allocation in the TIAA-CREF Social Choice Fund (TICRX) from 30% to 10%,
- Replace it with 10% Nuveen ESG Large Cap Growth (NULG) and 10% Nuveen Large Cap Value (NULV)
- This move will raise the ESG score of the US Core category from 7.2 to 7.5 and lower the expense ratio from 45bps to 38bps
- Eliminate the Calvert Small Cap fund (CCVAX)
- Replace it with Nuveen ESG Small Cap (NUSC).
- ESG score for US Small Cap segment will improve from 3.9 to 6.0 and expenses will drop from 121bps to 40bps.
We also evaluated new ETFs on the list in the Developed Non-US and Emerging Market equity space, and on the fixed income side, but the tradability of these ETFs are not conducive to incorporating them at this time. We will look at these again in the next 12 months.
Attached is some material regarding the ETFs being added to the model as well as Morningstar Snapshots for the new models. The model weights spreadsheet has been updated on the Knowledge Base, and Fact Sheets will be updated soon.
As always, if you have any questions or concerns you can reach us at email@example.com or 360-301-7579.