On Thursday Feb 3rd, The Street published the following column by Mark Abssy, highlighting Amberwave’s new exchange traded fund (ETF) that pursues an impact investing strategy based on American jobs, security, and economic growth (JSG). The piece provides an overview of Amberwave’s new ETF and explains the different factors that Amberwave considers when evaluating companies based on JSG factors.
Read the full column below:
Given Fox News’ recent interview of a Reddit moderator of the r/antiwork subreddit that could only be described as an act of self-immolation, I thought it would be fitting to take a look at a newly listed exchange-traded fund that is focused on jobs, security, and growth.
New issuer Amberwave Partners has an intriguing story. Usually, what we hear is that some Beltway types leave public service for lush appointments at top tier law or investment firms or become lobbyists. Amberwave’s principals, however, decided to jump from the pan of the U.S. Treasury and straight into the fire of starting a new issuer and launching an ETF. To quote one of the better known lyrics of Guns N’ Roses, “Welcome to the jungle!”
Into the Wild IUSA
The Amberwave Invest USA JSG Fund (IUSA) was launched Jan. 19. While many firms have been adopting the language and posturing of focusing on environmental, social, and governance issues Amberwave decided to focus on what they feel are the more tangible, or at least more measurable metrics of Jobs, Security and Growth (JSG). The fund sports a 67-basis point expense ratio meaning that shareholders investing $1,000 would expect to see $6.70 in fees over a calendar year.
IUSA is actively managed so there’s no index to review. Having said that, the security selection process is outlined in the summary prospectus and begins with a universe that is based on the constituents of the S&P 500 Index GSPC. From there, analysts use both quantitative and qualitative inputs as well as their own forecasts to score each company based on their contribution to each of the following:
Jobs: This score evaluates a company’s contribution to the health of the U.S. labor market and its ability to provide opportunities for Americans. Factors that play into this score include the pace of job creation, the role of the company in the overall labor market, level of focus on economically disadvantaged communities and groups, how well (or poorly) workers are treated, and focus on US-based hiring, among other metrics.
Security: This score evaluates a company’s contribution to the overall security of the United States, including the company’s contribution to U.S. supply chain resilience, its role in addressing emerging threats to U.S. national security, particularly with respect to cyber threats, its role in advancing U.S. resource and energy independence, and the company’s international posture, including dealings with foreign governments.
Growth: This score evaluates the company’s contribution to the healthy long-term economic growth of the United States and considers factors such as the levels of the company’s investment in the United States (capex spending), contribution to long-term productivity growth, domestic impact of operations, non-core commercial activities, including anticompetitive behavior and engagement with the U.S. political system.
Once all names in the initial universe have been scored a weighted average score is produced using a 50%/25%/25% scheme applied to jobs, security, and growth results, respectively. Names are grouped by Global Industry Classification Standard sectors and companies with JSG scores in the top quintile (20%) of each sector are selected. Because the issuer is attempting to fully represent the US economy it is important to note that this fund does not simply select the top quintile of JSG scored names of SPX but makes selections at the sector level as outlined above.
Once all names have been scored and a final holding list has been selected, the issuer employs what it describes as “a proprietary algorithm” to determine final weights. While there are no stated market capitalization or liquidity thresholds, the starting security pool is based on SPX so the same filters apply. Still, position weights may be adjusted based on holdings’ market capitalization or other liquidity metrics and in an effort to avoid any individual name or sector lopsidedness in the portfolio the issuer plans to rebalance the portfolio on a monthly basis.
Reviewing the holdings and comparing them to SPX provides some clear examples of Amberwave’s approach in action. For example, the fund’s “Communications Services” sector holdings make what looks like a wholesale exclusion of social media companies, including Meta Platforms (FB), Twitter (TWTR), and Match Group (MTCH). Also absent are video game developers Activision Blizzard (ATVI), Electronic Arts (EA), and Take-Two Interactive Software (TTWO). The one selection that initially stood out was picking Tesla (TSLA) over Ford (F) but if I think more about the overall impact TSLA has had on the U.S. economy this makes sense. I mean, without TSLA do think the White House would have made it a policy goal to install 500,000 EV charging stations across the country? Probably not.
Overall, some individual names I was surprised to see missing in the portfolio include Alphabet (GOOG), (GOOGL) and Apple (AAPL) but if anything, that’s a clear signal to me that this issuer has conviction in their process and isn’t just rebranding SPX with some shiny “U-S-A, U-S-A” stickers. Another aspect of the strategy that speaks to high conviction is the issuers approach to proxy voting. From the prospectus, “The fund will also apply its proxy voting guidelines to vote in favor of corporate actions that, in the view of the Adviser, will promote U.S. jobs, security, and growth.” Not just investing in companies that they think are doing right by the three mandates but also taking an activist stance to make sure companies continue to do so.
Wrapping It Up
Amberwave’s founders have all spent time in public service at the U.S. Treasury. In reviewing this fund it is clear to me that they have taken that experience and put it to good use by developing a strategy that focuses not just on individual companies’ success, but also the benefits of that success for this country at both a local and national scale. Like a previous launch I covered recently, this fund was seeded with $500,000. I’ll say the same thing here, which is that initial seed capital, or any AUM level really, should be irrelevant to investors evaluating a new or existing ETF. As I’ve said before, don’t forget that ETF liquidity is based on the liquidity of a fund’s underlying securities. The Creation/Redemption process turns ETFs into conduits that allow investors to access massive pools of liquidity, over $13 trillion in this case so don’t let this fund’s small size deter you from making that trade if you understand and want to participate in IUSA’s strategy.