Examining The New Vegan ETF

The U.S Vegan Climate ETF has beaten the S&P 500 over its brief history, but it's a fund press release that is more eye-catching.

Author:
David Dierking
Publish date:
Jul 19, 2020

ESG, or environmental, social and governance, investing has grown progressively more popular over the past couple of years. The idea of investing while at the same time avoiding "sin stocks" in the areas of oil drilling, gambling, weapons manufacturing and other similar industries has proven to be an intriguing idea for many investors, particularly millennials, who wish to take a social stance with their portfolios.

Some of the largest ESG funds manage well over $1 billion and figure to continue growing.

One ETF in particular has taken a rather direct approach in its appeal for investor dollars.

The U.S. Vegan Climate ETF (VEGN) screens for a variety of ESG considerations, primarily animal harm and exploitation, as well as fossil fuels, environmental damage, and human rights. VEGN follows a cap-weighted index, so it's heavily tilted towards large-cap names.

In a way, the name of the fund is a bit of a misnomer. Investors may have the notion that the fund invests in companies strictly tied to the vegan lifestyle, such as Beyond Meat (BYND). In reality, it's just excluding companies that engage in the practices detailed above.

Since it's cap-weighted, its top 10 holdings have an S&P 500 feel to them.

Some notable names have been screened out - Alphabet and Amazon, in particular - but this fund still skews very heavily towards mega-cap names. Therefore, it's reasonable to use this fund as an S&P 500 replacement in the core of your portfolio if you wish to screen out some of the more socially- or environmentally-questionable names.

That's a fair objective for VEGN, but it's the fund's direct appeal to investors that's most eye-catching.

In the original press release for the fund's launch, Beyond Advisors, the creator of the U.S. Vegan Climate Index, want to make sure you know that you're investment is making a direct impact on animal cruelty.

Through its screening, the US Vegan Climate Index participates in no business activity that harms animals. As compared with an exposure to the Solactive US Large Cap index, an investor in this new index will avoid funding the slaughter of 13 animals a year for every $1,000 invested.

That's right! Invest or the animals get it!

I'm not sure exactly how the company came up with this number, but the notion of saving the environment or animals is often prominent in ESG advertising. It's just perhaps never been as explicit!

VEGN has been around for a little under a year now having debuted on September 9, 2019. To date, the fund has done quite well, but it probably shouldn't be that surprising.

VEGN has outperformed the S&P 500 by more than 6% since inception. A good start to say the least and it probably has its sector allocation to thank for it.

You probably wouldn't be surprised to hear that VEGN has almost no exposure at all to the energy or consumer staples sectors.

Energy is out because of its environmental considerations exposure to oil drilling and consumer staples likely because of food processors, manufacturers and the like. The energy sector, obviously, has been miserable this year as energy demand dries up thanks to the COVID outbreak. Consumer staples, despite a nice stretch of outperformance during the early stages of the bear market, has lagged considerably as investors load up on growth stocks again.

On the other hand, VEGN's nearly 65% exposure to the combination of tech and communication services has led to big gains. The fund's limited exposure to the market's cyclical sectors has also helped.

Conclusion

Is VEGN a good replacement for a core S&P 500 or total stock market fund in your portfolio? It certainly could be if ESG principles are important to you. The 0.60% expense ratio is a little steep when considering a fund, such as the Vanguard S&P 500 ETF (VOO), charges just 0.03%. That's a very steep hill to climb on an annual basis.

It's also important to remember that you're not necessarily investing in a vegan industry fund. This is simply more of a general ESG fund that avoids certain companies or industries with an emphasis on avoiding animal cruelty.