The long-awaited moment is soon upon us. Morgan Stanley has filed for its first ever U.S. listed ETFs and these products should be out by the end of 2022. Morgan Stanley will be joining the growing number of well-established asset managers to enter the ETF market in the last few years, along with Capital Group, Dimensional Funds, DoubleLine, Federated, Matthews Asia, and Neuberger Berman among many others.
Morgan Stanley has filed to launch four ESG-focused index ETFs. Three of the products – the Calvert U.S. Large Cap Core Responsible Index ETF, the Calvert U.S. Mid-Cap Core Responsible Index, and the Calvert International Responsible Index ETF – are tied to the Calvert principles for responsible investment framework. According to the ETFs’ prospectus, Calvert seeks to identify companies that operate in a manner that is consistent with or promotes: environmental sustainability and resource efficiency (such as reducing carbon emissions and managing water scarcity); equitable societies and respect for human rights (such as promoting diversity and gender equity across workplaces, marketplaces, and communities); and accountable governance and transparency (provide responsible stewardship of capital in the best interests of shareholders and debt-holders)
Meanwhile, index components of the pending Calvert U.S. Large-Cap Diversity, Equity, and Inclusion Index ETF must meet certain criteria relating to leadership in having a diverse workforce and an equal and inclusive work culture or demonstrate significant improvement in diversity practices. The Calvert Principles serve as a framework for considering environmental, social, and governance (ESG) factors.
There were no tickers or expense ratios listed for the ETFs, though this is common with the initial filing of the prospectus.
While some of the new ETF entrants have launched actively managed ETFs out of the gate, something we expect Morgan Stanley to do in the future, the firm is replicating strategies that have had success in the mutual fund wrapper. Calvert is a well-known brand for ESG-focused registered investment advisors.
For example, the Calvert U.S. Large Cap Core Responsible Index Fund (CISIX) is a $4.1 billion U.S. large-cap mutual fund that earned a five-star rating from Morningstar and the institutional share class charges a 0.24% expense ratio. The retail share class charges a 0.49% fee. The fund’s top positions include Apple, Microsoft, and Alphabet.
Meanwhile, Calvert International Responsible Index Fund (CDHIX) is a $700 million foreign large-cap mutual fund that earned a four-star rating from Morningstar and charges a 0.29% fee (0.54% for the retail share class). The fund’s top holdings include Taiwan Semiconductor, Nestle, and Samsung Electronics.
It is easy to dismiss Morgan Stanley as being a late arrival to the ETF market, as the first products are nearly 30 years old. However, it remains the early days for ESG ETF adoption and the firm has the scale, resources, and team to educate advisors and investors about the merits of the new products to be used individually or in model portfolios.
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