Sustainable Investing in 2024

The Portfolio Managers of the Hennessy Stance ESG ETF discussed the lack of breadth in the 2023 market, the portfolio’s fluctuating sector weightings, ESG regulations, and the outlook for sustainable investing.

February 2024
  • Kyle Balkissoon
    Kyle Balkissoon
    Portfolio Manager
  • Bill Davis
    Bill Davis
    Portfolio Manager

Information about the Hennessy Stance ESG ETF (the “Fund”), a semi-transparent actively managed exchange-traded fund ("ETF") with a Portfolio Reference Basket structure:

The Fund is different from traditional ETFs. Traditional ETFs tell the public what assets they hold each day. The Fund will not. This may create additional risks for your investment. For example:

  • You may have to pay more money to trade the Fund’s shares. The Fund will provide less information to traders, who tend to charge more for trades when they have less information.
  • The price you pay to buy Fund shares on an exchange may not match the value of the fund’s portfolio. The same is true when you sell shares. These price differences may be greater for the Fund compared to other ETFs because it provides less information to traders.
  • These additional risks may be even greater in bad or uncertain market conditions.
  • The Fund will publish on its website each day a “Portfolio Reference Basket” designed to help trading in shares of the Fund. While the Portfolio Reference Basket includes all the names of the Fund’s holdings, it is not the Fund’s actual portfolio.

The differences between the Fund and other ETFs may also have advantages. By keeping certain information about the Fund portfolio secret, the Fund may face less risk that other traders can predict or copy its investment strategy. This may improve the Fund’s performance. If other traders are able to copy or predict the Fund’s investment strategy, however, this may hurt the Fund’s performance.

For additional information regarding the unique attributes and risks of the Fund, see the Prospectus and SAI.

What surprised you the most about the equity market in 2023?

The lack of the number of stocks contributing to the market’s return was most surprising. Until the fourth quarter of 2023, virtually all the gains were attributed to the top seven positions in the S&P 500® Index, i.e., the companies with the largest market caps, driven by euphoria around artificial intelligence. These “Magnificent Seven” stocks (Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta Platforms) were up an average of 107% for the year, yet in 2022 these same stocks averaged a 50% decline. 

However, in the fourth quarter, we saw a greater participation of stocks in market performance and anticipate that it will continue in 2024.

How have sector weightings changed over 2023? 

With the rebalancing of the portfolio, the ETF’s sector weightings change each quarter. In the fourth quarter, STNC had no exposure to Consumer Staples, which is somewhat rare for the portfolio. For example, in the first quarter of 2023, the ETF was overweight Staples, at 13% of the portfolio, compared to the S&P 500. In general, the portfolio tends to be overweight Industrials and Health Care relative to the S&P 500, and 2023 was no exception.

The Fund began 2023 with an underweight in Technology but ended up the year with an overweight to the sector. However, we maintain a maximum position size of 3.55% while Microsoft is now a 7% weighting in the S&P 500 and Apple is 6.7%. We believe it’s risky to have nearly 14% of the portfolio in just two names and 26% in just seven names. 

Would you please provide the investment case for a few stocks that have remained in the portfolio from previous quarters?

WW Grainger has been in the portfolio over the past few quarters. From an ESG standpoint, the company scores well on carbon productivity and board gender diversity; fundamentally, the current driver for inclusion is its return on equity. Similarly, Mastercard has consistently been a better-than-average ESG company, excels at sustainable investments, and is currently forecasting an attractive 3-year revenue growth.

Would you please provide an update on the status of ESG regulation and how it might affect companies’ sustainability goals?

In March 2022, the SEC issued a proposed rule to enhance and standardize climate risk disclosure requirements of public companies. This rule has yet to be finalized, and so thus far it’s difficult to speculate on its potential impact. Our view is that it will have significantly less impact than recently enacted laws elsewhere. Specifically, California recently passed SB 253 which requires that businesses with more than $1B in revenue that conduct business in the state must verify and disclose their scope 1, 2, and 3 greenhouse gas emissions. In addition, a parallel California bill (SB 261) requires businesses to publicly disclose physical and transition climate risks and how they are addressing them. We believe this act may force many large companies to be more transparent around these issues.

What is your outlook for sustainable investing over 2024?

The political climate in the U.S. has slowed the march toward a lower carbon future, but it is not changing the underlying currents of movement toward greater disclosure and greater ambition towards de-carbonization. We believe many companies are viewing de-carbonization as an opportunity to grow market share and open new markets, but may be less likely to broadcast their efforts.

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The Fund's investment objectives, risks, charges, and expenses must be considered carefully before investing. The prospectus contains this and other important information about the investment company. Please read it carefully before investing. A hard copy of the prospectus can be requested by calling 1-800-966-4354.

Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted and can be found here. Neither forward earnings nor earnings growth is a measure of a fund’s future performance.

ETFs are subject to additional risks that do not apply to conventional mutual funds, including the risks that the market price of an ETF’s shares may trade at a premium or discount to its net asset value, an active secondary trading market may not develop or be maintained, or trading may be halted by the exchange in which they trade, which may impact an ETF's ability to sell its shares. Shares of any ETF are bought and sold at market price (not NAV) and are not individually redeemed from the ETF. Brokerage commissions will reduce returns.

ESG investing risk is the risk stemming from the Environmental, Social, and Governance factors that the Fund applies in selecting securities. The Fund intends to invest in companies with measurable high ESG ratings relative to their sector peers, and screen out particular companies that do not meet its ESG criteria. This may affect the Fund’s exposure to certain companies or industries and cause the Fund to forego certain investment opportunities. The Fund’s returns may be lower than other funds that do not seek to invest in companies based on ESG ratings. The Fund seeks to pursue its investment objective by using proprietary models that incorporate quantitative analysis. There is no guarantee that the Portfolio Managers’ use of these models will result in effective investment decisions for the Fund. From time to time, the Fund may concentrate its investments in one or more industry sectors. The Fund is currently substantially invested in the Consumer Discretionary and Health Care sectors and its performance is therefore tied closely to, and affected by, developments in these industries.

The Portfolio Reference Basket is not expected to represent the actual portfolio of the Fund because the weightings of the securities in the Portfolio Reference Basket generally are different from the weightings of the securities in the actual portfolio.

Guardrail Amount: 10%

The Guardrail Amount is the maximum deviation between the weightings of the specific securities in the Portfolio Reference Basket and the weightings of those specific securities in the Actual Portfolio, as well as between the weighting of the respective cash positions. The Guardrail Amount is intended to ensure that no individual security in the Portfolio Reference Basket will be overweighted or underweighted by more than the publicly disclosed percentage when compared to the actual weighting of each security within the Actual Portfolio as of the beginning of each trading day. The Guardrail Amount is designed to help investors evaluate the risk of tracking error, which is the degree to which the performance of the Portfolio Reference Basket deviates from the performance of the Actual Portfolio.

Although the Portfolio Reference Basket is intended to provide investors with enough information to allow for an effective arbitrage mechanism that will keep the market price of the Fund at or close to the underlying NAV per share of the Fund, there is a risk (which may increase during periods of market disruption or volatility) that market prices will vary significantly from the underlying NAV of the Fund.

The Fund's bid-ask spreads and premiums/discounts may be larger than those for traditional ETFs due to the lack of transparency, thus making trading in the Fund's shares more expensive.

Diversification does not eliminate the risk of experiencing investment loss.

Market participants may attempt to reverse engineer the Fund’s trading strategy, which, if successful, could increase opportunities for trading practices that may disadvantage the Fund and its shareholders.

The Fund is subject to certain other risks, including but not limited to, equity securities risk, large-capitalization risk, market risk, active strategy risk, and market trading risk. Investing involves risk, including possible loss of principal. Gains or losses on a single stock may have a greater impact on the Fund. For these and other reasons, there is no guarantee the Fund will achieve its stated objective.

Distribution Rate reflects the investment income per share during the last 12 months divided by the share price at the end of the period, expressed as an annual percentage rate. It is calculated by annualizing the Fund’s most recent distribution. The annualized dividend yield may not reflect the actual yield an investor would receive. 30-Day SEC Yield is a standardized yield computed by dividing the net investment income per share earned during the past 30-day period by the share price at the end of the period, expressed as an annual percentage rate. The 30-Day SEC Yield should be regarded as an estimate of the Fund’s rate of recent investment income, and it may not equal the Fund’s actual distribution rate. Past yields are no guarantee of future yields.

Glossary of Terms contains definitions and additional information.



Opinions expressed are subject to change at any time, are not guaranteed, and should not be considered investment advice.

The Hennessy Funds are offered only to United States residents, and information on this web site is intended only for such persons. Nothing on this web site should be considered a solicitation to buy or an offer to sell shares of any Hennessy Fund in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction.

Quasar Distributors, LLC, Distributor.

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