Today we are pleased to announce that we will begin integrating the $ VOTE ETF, recently launched by engine no. 1, to all Betterment socially responsible investment portfolios.
This new ETF invests in 500 of the largest U.S. companies, weighted by size, with a management fee of only 0.05%. You might think this looks a lot like a garden variety index fund that has been tracking the S&P 500, a commodity for many years.
So why the excitement?
In short, $ VOTE represents a highly innovative approach to driving the economy toward sustainability by investing in index funds. It may be “passive” in the traditional sense (buying shares in purely index-based companies), but it is “active” in relating to those companies as a shareholder.
Beyond divestment: what is shareholder participation?
Historically, investment aligned with securities has often been synonymous with avoiding the purchase of certain shares, a practice often known as “divestment”. The alternative to divestment is “commitment”. By having a share and using your rights to vote on shareholder resolutions, you can try to change the company’s activities from within.
Vanguard, BlackRock and State Street – the three major fund managers – are collectively the major shareholders in most companies, but have historically been reluctant to shake the ship and aggressively challenge management. As a result, when investing through index funds, the full potential of shareholder participation has not been exploited to drive change.
The new $ VOTE ETF of engine no. 1 promises to change it. To understand why, it helps to understand the mechanics of how shareholders can drive change.
Voting by delegation
Buying shares in a company gives you not only a share of its profits, but also the right to influence decision-making. This process is called “representation voting,” which can be a powerful tool with the potential to transform the entire economy, business by business.
Listed companies operate as quasi-democracies, accountable to their shareholders. They hold annual meetings, where shareholders can vote on various topics. Shareholders who do not agree with any aspect of how a company’s business develops may collaborate with management and, if they believe they are not being heard, may file an alternative action by making a “proposal for shareholders “.
If they can persuade most all shareholders vote in favor of the proposal, they can cancel the management. When a more drastic change is guaranteed, these “activist” shareholders can try to completely replace management by appointing their own candidates to the company’s board of directors.
Shareholder activism: social change through commitment
Social change through shareholder activism has a historical history. As early as 1951, in a critical case, civil rights leader James Peck brought the struggle to power by submitting a shareholder proposal to the Greyhound Corporation, recommending that the civil rights operator buses abolish segregated seats in the south.
Seventy years later, on May 26, 2021, the No. 1 engine of the activist fund surprised the corporate world by winning a power battle against the current leadership of ExxonMobil, persuading a coalition of shareholders to choose three of their own council candidates: first case of climate-focused change.
Engine number 1 argued that Exxon’s share price was lower than that of its peers because the company was not prepared for the transition from fossil fuels. He nominated candidates for the council that would push the oil giant to adopt renewable energy. Against all odds, with only 0.02% of Exxon shares, the No. 1 engine prevailed.
Corporate boardrooms across the S&P 500 are excited and wondering what Exxon’s blow means to them. Where will environmentally and society-conscious investors attack? These questions are justified: Exxon’s campaign was the first, but it certainly won’t be the last.
“Index activism”: bringing power to people
Individual investors are increasingly aware of voting by representation as a domain through which their portfolios can channel their values. In a recent Morningstar report, 61% of respondents said sustainability should take into account how those attributable to their 401 (k) s are voted.
However, most Americans, including Betterment customers, do not buy shares of companies like Greyhound or Exxon directly, but through index funds.
When you buy a portion of an index fund, the index fund manager uses your money to buy shares of companies on your behalf. As a shareholder of the fund, it benefits financially when these underlying shares increase in value, but the index fund is technically the shareholder of each company and has the right to participate in the voting process on behalf of each company.
As more investors tell the industry that they want their dollars to advance in sustainable business practices, the big three have been feeling the pressure for these preferences to be incorporated into their representation voting practices.
This year, they are showing some signs of change. In particular, the big three joined the No. 1 engine coalition, which could not have beaten Exxon without their support. However, even if the Big Three, which manage billions on behalf of individual investors, continue to side with activists, what’s missing is a way to invest your dollars not only to support these campaigns, but also to lead them.
What makes $ VOTE special
Activist shareholder campaigns are usually led by hedge funds and what happened with Exxon was no exception. However, with the launch of an ETF that everyone can invest in, engine number 1 wants to break this mold.
In 2020, investors invested $ 50 billion in sustainable index funds, double that of 2019 and ten times that of 2018. The $ VOTE ETF should exclude even more investors and sustainable investments, for two reasons.
First, instead of diluting their efforts, $ VOTE intends to lead a handful of campaigns, pushing companies to improve their environmental and social practices. A focus on maximum impact and the most powerful narratives will continue to raise awareness for the power of shareholder activism.
Second, $ VOTE is designed for mass adoption, not as a niche strategy. With a management fee of only 0.05% and the monitoring of a weighted market capitalization index, $ VOTE is designed to ensure no change in long-term profitability. It is also very suitable for those who invest in retirement and, as of today, will open its first 401 (k) plan, through Betterment for Business.
What does $ VOTE mean to investors?
We know that many of our clients want to invest to make a real impact, especially if they can do so without sacrificing their long-term financial goals. If you invest through any of Betterment’s three socially responsible investment portfolios, $ VOTE will have a target weight of 10% of its exposure to U.S. equities.
With $ VOTE in your wallet, you’ll know that your dollars directly support the commitments the No. 1 engine launches below. As your subsequent work develops, we will track your efforts and update our clients on the impact your investments generate.
Now that there is $ VOTE, everyone, not just Betterment customers, can invest in it, which is great. The bigger you are, the more you can drive change, and as an investor, help me write the next chapter.
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