Launch of the TOV ‘invest Jewishly’ ETF puts activism to the test

When hedge fund Engine No. 1 sold its exchange traded fund business in 2023, the concept of activist ETF investing slipped from the headlines, but the team behind the “invest Jewishly” ETF wants to put it back.

The JLens 500 Jewish Advocacy US ETF (TOV) launched on February 27 with the stated aim of empowering investors “to combat antisemitism, support Israel and embody Jewish values”.

One month has passed and some observers might say it got off to a slow start considering that $100mn of the $121mn it has so far amassed in assets is accounted for by the seed capital corralled by the US-based Jewish advocacy group, the Anti-Defamation League, which acquired JLens in 2022 to extend the reach of its fight against antisemitism.

The founders JLens and ADL, which itself contributed just $10mn, are unconcerned.

“We believe in own and advocate,” said Ari Hoffnung, managing director of JLens, adding that the TOV ETF was aimed at investors from all backgrounds who wanted to support Jewish shareholder advocacy focused on fighting antisemitism, supporting the state of Israel and aligning themselves with Jewish values of tikkun olam, which means “world repair”.

Investors are paying a premium for that service at 18 basis points for TOV, which is steep given that the underlying VettaFi index of the 500 largest US public companies has a lot in common with S&P 500 that can be accessed through the Vanguard S&P 500 ETF (VOO) for just 3bp.

The higher charge might be justified because of the service that TOV promises to deliver: it aims to eliminate from the list of US large caps those companies that do not align with Jewish values, then score and weight the remaining companies on Jewish values and finally advocate by engaging with corporate leaders. The passive index is reconstituted quarterly.

“Screening is light and that is deliberate,” said Hoffnung. Companies that derive material revenue from tobacco, thermal coal or oil sands — or those that engage in or condone “anti-Israel” activities — are excluded. The four companies currently screened out are: Altria, Philip Morris, ConocoPhillips, and General Mills. The food company divested from its business interests in Israel in July 2022 in a move that was widely claimed as a victory for pro-Palestine pressure groups, though the company’s announcement cited business reasons.

“While sentiment for broad ESG ETFs has slowed in recent years, these targeted ETFs can have a loyal following,” said Todd Rosenbluth, head of research at TMX VettaFi, referring to the downturn in enthusiasm for investing according to broad environmental, social or governance principles. “Their appeal is not just equity market participation but something deeper,” he said.

There are few ETFs that seek to do the same as TOV. The TCW Transform 500 ETF (VOTE), which TCW bought from Engine No. 1 in 2023 (two years after the activist hedge fund won a proxy battle and gained seats on Exxon’s board) is probably the nearest example. VOTE seeks to engage with companies on topics such as corporate strategy and governance, climate-related business plans and executive compensation. It provides its service for 5bp and has amassed $726mn in assets under management.

TOV’s founders also compared their ETF to the $859mn S&P 500 Catholic Values ETF (CATH), which provides exposure to the companies whose business practices adhere to socially responsible investment guidelines outlined by the US Conference of Catholic Bishops and excludes those that do not. The ETF currently has 439 holdings.

“In an increasingly polarised world, it is not a surprise that investors want to align their investments with their beliefs. This fund shares some similarities with a range of ‘identity ETFs’ which have popped up over the years,” said Kenneth Lamont, principal at Morningstar.

Lamont pointed to the existence of other ETFs such as the $30mn MAGA Point Bridge America First ETF, which restricts itself to 150 S&P 500 companies deemed to be highly supportive of Republican candidates.

“The seed capital in the TOV ETF means it likely will have a longer shelf life than some of its ‘identity’ peers,” said Lamont. “But the assets remain a rounding error in the broader context of the asset management industry,” he added.

However, Elisabeth Kashner, director of ETF research and analytics at data provider FactSet, said leveraging the proxy vote was a very different approach to the “buyers’ strike” method that relied on investment or divestment to try to influence corporate behaviour.

“Leveraging the proxy vote is theoretically superior, as proxy voting is a way to directly influence corporate behaviour,” said Kashner pointing out that TOV was also incorporating that with a “buyers’ strike” approach as evidenced by the exclusions.

“The best case for paying a small premium over the cost of a standard vanilla US large cap ETF for the proxy/influence service is that having representation is helpful,” Kashner said, pointing to Engine No. 1’s role in the Exxon board votes in 2021.

Whether investors properly understand what they are buying into remains moot, however. The UN Principles for Responsible Investment recommends defining what metrics in activist or sustainable funds should be taken to define success. Some investors might not understand that excluding a US megacap company from a small fund will not move the needle.

“Investors buy into these funds to support their chosen cause, but rarely appreciate the limited real world impact an investment will make given the size of the largest listed equities,” said Lamont.