Ep.103 - How to #InvestBlack - We Need More Racial Equity-Based ETFs
📸 IG handle: DollarSenseLA
MONEY IS POWER, AND MONEY CAN CHANGE THE POWER DYNAMIC IN A STATUS QUO
Let’s first start with the facts about racial inequity in the U.S, according to the U.S Chamber of Commerce.
The net worth of a typical white family is almost 10 times the net worth of the average Black family.
Black-owned non-employer businesses are less than half as likely to get financing as white-owned firms.
Black unemployment rates have been consistently twice as high as white unemployment rates for the past four decades.
Black entrepreneurs are nearly three times more likely than white entrepreneurs to have business growth and profitability negatively impacted by a lack of financial capital.
Investing can be an effective lever to reduce racial inequity in wealth. However, before delving into the details of advancing racial equity through investment, I want to acknowledge that investing is unlikely to solve the problem of white supremacy, as well as the racial inequity that comes with it. To truly fix it, it will take more than just money. Before any money is even involved, it would take a national awakening via the collective acknowledgment of America’s racist past, and the acknowledgment of white supremacy in the present. Then the healing work can begin, and money can help facilitate.
So why am I talking about improving racial equity through investing, if it can’t solve the problem? It’s because money is a source of power. When Black businesses have more wealth (not just income), there can be a greater ability (and probability) to force the national awakening, whether the other side likes it or not.
In other words, investing will help generate wealth, from which power can derive to shift the relative power dynamic from the status quo.
STOCKS (SPECIFICALLY VIA ETFs) ARE THE MOST SCALABLE WAY TO INVEST IN BLACK BUSINESSES
Most of you know these popular indices in the stock market: the S&P500, the Dow Jones, and the NASDAQ. An index by itself is a metric, a gauge, a barometer, it cannot be invested in. However, people can invest in the corresponding ETF, Exchange-Traded Funds, that turn an index into an investable tool, so people can buy and sell, just like a typical Apple stock or Google stock.
To invest in the S&P500, you can buy shares into the corresponding ETF, with the ticker (the technical code) of SPY. Similarly, DIA is an ETF for the Dow Jones; QQQ is an ETF for the NASDAQ.
When you invest in the ETF, you are directly supporting the companies the ETF holds. Out of the +2000 ETFs out there, do you know how many ETFs exist as a proxy for companies that advance racial equity?
—-> JUST ONE
THE MORNINGSTAR MINORITY EMPOWERMENT INDEX IS YOUR ONLY OPTION RIGHT NOW
The Morningstar Minority Empowerment Index is an index that tracks the advancement of racial equity. But your options stop here because there’s just this one index in the investment space. You can invest in this index by buying the corresponding ETF (ticker NACP) that tracks it, Impact Shares NAACP Minority Empowerment ETF. Though this ETF is a good attempt, it is far from being perfect as a proxy to invest in Black businesses. You will find out why later in this article.
You should be aware, though the ticker of NACP resembles the organization of NAACP, this fund is NOT created or endorsed by the NAACP.
Impact Shares NAACP Minority Empowerment ETF is a small ($5.6M in assets) fund that began in July 2018. The stated objective is to track the Morningstar Minority Empowerment Index, which is designed to provide exposure to US companies with strong racial and ethnic diversity policies in place, empowering employees irrespective of their race or nationality.
According to their fact sheet, the company selection criteria are based on research from Sustainalytics and NAACP’s Racial Equity Industry Report Cards, with the following lenses. Unfortunately, they do not provide more granular details, such as the minimum threshold on Board Diversity. Is it at least 1 person of color or 2? We do not know.
Board Diversity
Discrimination Policies
Scope of Social Supplier Racial and Ethnic Diversity Programs
Digital Divide Programs
Freedom of Association Policies
Diversity Programs
Supply Chain Monitoring for Racial and Ethnic Diversity
Community Development Programs in Minority Communities
Minority-Inclusive Health and Safety Management Systems
Conflict Minerals Programs
THE MORNINGSTAR MINORITY EMPOWERMENT INDEX IS NOT A GOOD PROXY TO SUPPORT BLACK BUSINESSES
Based on the criteria that are set forth, below are the top companies in its portfolio. I believe this fund is perhaps a passable proxy of racial equity for “overall minority'', but not so much for Black/African Americans.
Why?
Because when a company states it hires a diverse employee base, oftentimes it does not mean the same for every racial group. Unfortunately, under the veneer of racial diversity, it usually means more Asian representation, not necessarily more Black/African Americans. This practice is most pronounced in Tech, which is the biggest sector in the portfolio, at 25.07%.
Let’s take the largest weighted company in this fund’s portfolio, Microsoft (5.93% of the portfolio), as an example. Although Microsoft is inclusive in terms of minorities as a whole, one can argue it lags behind significantly in terms of Black/African American representation. In the 2019 Diversity Report, though 46.7% of all Microsoft employees are categorized as minorities, only 4.5% are Black/African Americans.
WE CAN SUPPORT BLACK BUSINESSES EITHER THROUGH PURCHASES OR INVESTMENTS, BUT INVESTMENTS ARE BETTER
You may wonder how you can take action to advance racial equity with your money, whether it’s $50 or $5,000? The two main ways are purchasing the products/services or investing in the business.
Out of the two, investing is arguably a more powerful tool because it has far fewer constraints, thus allowing far more people to participate. Supporting a business by direct purchasing has two common limitations, the innate demand and ease of access. For example, I can support a Black-owned furniture company by buying its product. But what if I don’t need a piece of furniture right now? Or what if the furniture store is not available in my area?
Instead of purchasing, one can invest in the furniture company without the need of furniture or a store in your area. When it comes to investing in companies that advance racial equity, one big challenge is the tool itself, as there hasn’t been an incentive strong enough for any major fund manager to create more indices/ETFs to allow people to invest.
Impact Shares NAACP Minority Empowerment ETF is not perfect, but perhaps it is a good start in the right direction that can serve as a guiding light for the creation of future racial equity-based funds.
Below are my thoughts on 3 alternative ways, where new funds can be created in order to explicitly support the cause of racial equity.
THREE IDEAS OF RACIAL EQUITY-BASED FUNDS FOR INVESTMENT
1. AN INDEX/ETF MADE UP OF BLACK-OWNED BUSINESSES
There is an opportunity to create an index/ETF, that’s made up of exclusively Black-owned businesses. By definition, a publicly traded company is owned by a group of people, not just one, therefore creating a slight technical difficulty to quantify a Black-owned business when the ownership is actually shared. In order to quantify a Black-owned business, one suggestion is to look into the largest non-institution shareholder of the company to determine if it is Black-owned or not.
In fact, the idea of creating such an index is not new. Back in December 1994, an index made up of 9 Black-owned businesses was created. It was called the Bloomberg/Color of Money index. While it existed, the index tracked 9 businesses, including United American Healthcare and BET Holdings. For more information, take a look at the 1996 publication from the New York Times. Unfortunately, this index was never materialized into a Mutual Fund (ETFs were not available at the time), which would have allowed people to invest in. This index has since fallen out of favor, it’s no longer a tracked index today.
2. AN INDEX/ETF MADE UP OF COMPANIES THAT HIRE BLACK EMPLOYEES
There is an opportunity to create an index/ETF, that tracks companies that make progress by hiring Black employees, not just a catch-all “minorities,” which typically ends up being Asian/Asian Americans.
In order to achieve this cause via investing, Impact Shares NAACP Minority Empowerment ETF can again be used as a guiding light. The major difference being that instead of evaluating a company through the lens of all minorities, we would evaluate the companies through the lens of Black/African Americans.
When screening a company to be considered in this portfolio, instead of asking how employee diversity has progressed, let’s ask the question of how Black employees have increased in the workforce specifically. The answers to these two questions are quite different. For example, let’s consider Microsoft: according to their 2019 report, while minority employees increased by 5.3 percentage points to 46.7% in 2019, Black employees only increased by 0.9 percentage points to 4.5%. Clearly, not all minority representation has progressed at the same pace at Microsoft.
3. AN INDEX/ETF THAT TRACKS COMPANIES THAT SUPPORT BLACK BUSINESSES FINANCIALLY
There is also an opportunity to create an index/ETF, that tracks companies that consciously support Black-own businesses. The idea is that not all companies are growing headcount, especially amid Covid19. While some companies may not be able to fight racial inequity in the most direct way, such as reforming the hiring practices to increase hires of Black/African Americans, they can proactively support the cause by indirectly supporting Black businesses in their daily operations or other ways.
There are 3 main ways to support a Black business financially: strategic partnerships, grants, and vendor selection. Here are some high profile examples in each category.
Strategic Partnerships
Grants
Vendor Selection
HOW TO MAKE IT A REALITY
In order to make any of my proposals from above a reality, we need two things: dedicated researchers and millions of dollars to start a fund. The research portion is relatively easy. It is the money part that’s significantly harder.
In terms of research, we need a team of dedicated full-time researchers to turn the proposed frameworks into concrete criteria, with which we can identify the right companies to put into the fund.
In terms of the starting fund, we need millions of dollars to kick it off, either from financial institutions or private high net-worth individuals. As a frame of reference, the Impact Shares NAACP Minority Empowerment ETF is a tiny ETF, but it still started with an asset of $5.6M.
The vast majority of the ETFs in existence are started by fund managers from financial institutions, such as Vanguard, Fidelity, etc. For racial equity-based ETFs, this route is difficult, but we don’t need to rely on financial institutions to make it happen. We can go with the high net-worth individual route. As an alternative, any multi-millionaire or billionaire can make it happen.
Most commonly, wealthy individuals (regardless of race) have their own funds that focus on investing their own money directly in the private market, as opposed to creating the tools to allow ordinary people to invest. While it can go deep, it doesn’t reach a wide scale. For example, Robert Smith runs Vista Equity Partners, a private equity firm. Jay Z runs Marcy Venture Partners, a venture capital firm. Will Smith runs Dreamers VC, another venture capital firm. Though all of them are amazing at providing funding to early startups of their choice, the impact is limited to their (and their partners’) own wealth, without further enabling the average person with $50 or $500 to invest in Black businesses in the broader ecosystem.
The silver lining is, if any of these wealthy people wanted to create a racial-equity based ETF, they have the means to make it happen on their own already.
FINAL THOUGHTS
Money is power and money talks, louder than words. This is why I believe investing in Black businesses can have a positive impact on improving racial equity in America.
One of the biggest challenges right now is the lack of tools. In other words, if you have a few hundred dollars ready to invest in Black businesses, there aren’t many options for you to put it to work. In fact, there’s only one place, Impact Shares NAACP Minority Empowerment ETF, that explicitly tracks companies that advance racial equity right now.
In order to remove the barrier caused by the lacking of tooling, I recommend creating racial-equity based ETFs in order to allow the average person to invest, whether with $50, $500, or $5000. To make this racial-equity ETF a reality, we need two key ingredients: dedicated research as well as millions of dollars from high net worth individuals who believe in the cause.