Speaker 1:
From the library of the New York Stock Exchange, at the corner of Wall and Broad streets in New York city. You're Inside the ICE House, our podcast from Intercontinental exchange on markets, leadership and vision in global business. The dream drivers that have made the NYSE an indispensable institution for global growth for more than 225 years. Each week, we feature stories of those who hatch plans, create jobs and harness the engine of capitalism right here, right now, at the NYSE and it houses 12 exchanges and seven clearing houses around the world. Now here's your host, Josh king, Head of Communications at Intercontinental exchange.
Josh King:
Hi everyone. This year, we celebrated the 25th anniversary of the first ETF and now, a quarter century later, the exchange traded product space is one of the fastest growing investment vehicles in the world today. There are over 2,100 ETFs listed in the United States, that provide retail investors with the ability to have broad exposure across baskets of stocks, bonds, commodities, currencies. And, as we heard on a recent episode, even ETFs of ETFs. The first ETF was based off of the S&P 500 index and many of the early products were based off of well known market indices.
Josh King:
Since then, innovative people and companies have brought new types of ETFs based on sophisticated indexes that track everything from clean energy to video games, to whiskey. Our guest today, Richard Cea leading UBS's first foray into the US ETF market, with a couple of ETFs aimed at sustainable, responsible and impact investing or SRI, with a launch of insight shares, patriotic employers, ETF and insight shares, LGBT employment ETF. According to a 2016 report on US sustainable, responsible and impact investing trends, more than one out of every $5 under professional management in the US, totalling 8.72 trillion, was invested according to an SRI strategy.
Josh King:
Why has UBS decided to jump into the deep end of the ETF pool and how does philanthropic values affect investing today? We'll find out in a moment.
Speaker 1:
Inside the ICE House is presented this week by the Secure Financial Transaction Infrastructure or the Safety Network. Safety is the backbone of the ICE platform providing high security, high speed, direct market access and trade execution capabilities to over 150 global markets. Safety connects data and analytics from more than 600 proprietary and third party market sources. More on Safety later in the show.
Josh King:
Richard Cea is an executive director in UBS's investor solutions group, where he is responsible for the bank's exchange traded products program, and recently launched insight shares. UBS's new line of socially continuous ETFs. Richard is at the exchange today for a panel discussion and is on the podium for the closing bell. Welcome to the ICE House, Richard.
Richard Cea:
Hey, thank you very much for having me.
Josh King:
Young man like you, ringing the closing bell of the New York stock exchange. Big honor.
Richard Cea:
It is indeed a very big honor and I will say though, I'm only on the podium, we gave it up to our co-chair pride to be the bell ringer today because, Eric Berger is his name, has just been so dedicated to the space for a long time. And we're just so excited to be here and celebrate the launch of the CTF.
Josh King:
Who else is on the podium with you?
Richard Cea:
We have a great mix of scholars in the LGBT space. People like Professor Lee Badgett, from the Williams Institute, Hayley Gorenberg from Lambda Legal, people who have been advocates for many, many years. We also have some investors, people who have realized the value in investing alongside their causes, not just because they think it's the right thing to do, although they do, but also because they see value in investing in these types of funds from a performance standpoint.
Josh King:
You're a local guy been watching these bells ringing for years. You ever thought you'd be up on that podium?
Richard Cea:
No, no. To be honest, I don't think you ever imagine that. And as you say, I'm a lifelong New Yorker, so there's something very special about the New York Stock Exchange and being at this place.
Josh King:
In January UBS launched the Inside Shares LGBT Employment Equality ETF. It has the ticker symbol pride, P-R-I-D. When you develop a ticker symbol, that one was an obvious one for this, but what's the marketing machinations that go along into coming up with that?
Richard Cea:
As you say, it's the Insight Shares UBS Employment Equality ETF, which is quite a mouthful, right? We just call it PRID, as you put it out there. And we had a list of some finalists that we were considering, something playing off the equality angle, but at the end of the day, what shouts out to people about LGBT equality, I think the word pride. And we love that ticker, we're going to be going for ticker of the year this year. We think it's got a good shot.
Josh King:
This marks UBS's in your first foray into ETFs, but it also reflects a growing segment of niche investment products. How does this product work and what made you consider creating this type of an investment?
Richard Cea:
Yeah. The beauty of PRID is that I actually don't think it has to be a niche investment. I think that's a common misconception around the product because while it has a very narrow focus from a social standpoint, the portfolio is actually very broad. This is a large cap core holding alternative...
Josh King:
Talk about some of those names?
Richard Cea:
... for investors who care about that. Apple, JP Morgan, Amazon. These are the top holdings in it. If you look at the composition of the fund, it's about 300 stocks right now, market cap weighted, 98% large cap names. At the end of the day, you're going to get a very similar exposure to the S&P 500, but with some sector tilts, tilted a little towards technology, tilted a little towards consumer discretionary, a little away from energy and industry, as somebody might expect when we're looking at companies that are promotional of LGBT inclusiveness in their workplace.
Richard Cea:
There's really two aspects to why we did this. One of them is that we think people want to put their money to work in products that can drive social change. And we believe that the stock market is a force for good. Obviously there's been a lot of bad things that have happened there's and the industry has gotten beaten up. But at its core capital markets are something that fuel the economy and they can fuel corporate change.
Richard Cea:
And people can put their dollars to work and encourage corporations to change. At the same time though, we believe that more diverse companies are going to outperform and there's a lot of evidence to this fact. It's a large capital term where we think has a little bit of a kicker in terms of potential out performance.
Josh King:
How do you pick these names for the basket? Obviously, are you looking at their diversity reports, are you talking to management, surveying what's been written about them in the press?
Richard Cea:
I would boil it down to three key criteria and two of them are more financial in nature because this is still an investment first and that's very important to us to be doing that correctly. We look at liquidity, first and foremost, we start with the 1000 largest companies in the US by market cap. And we filter out anybody who doesn't have a billion market cap and 25 million ADV over the last three months. From there, we look at net operating margin over the last 12 months, got to be positive. This isn't to say that this is a smart beta quality strategy, but it's got to be at least positive. You've got to be profitable over the last 12 months.
Richard Cea:
And then from there, the most interesting criteria is that we utilize the Human Rights Campaign's corporate equality index. And for those who don't know, the Human Rights Campaign is the largest LGBTQ civil rights organization in the US. And from back in 2002, they've been publishing something called the Corporate Equality Index, and it's not an index like a financial index. It's really a scoring system, where companies get scored between minus 25 and 100. We take anybody who has an 85 or higher who met that financial criteria and that's our index.
Josh King:
You're using the Human Rights Campaigns scoring. Are you letting companies lobby you specifically or send you additional information?
Richard Cea:
Nope. It is a passive fund and a passive index. And so we use objective data in that calculation, but what's the human right's campaign scoring is really your question, how do you get 100? Some of the things that they take into account would be, do you have an explicit non-discrimination policy in your employment practices for sexual orientation? Do you for gender identification?
Richard Cea:
Those two things are off the bat or a large percentage of the score. And the reason for that is because, and this is the fact that think a lot of people don't know, in 28 states there's no non-discrimination protection for LGB people and in 30 there's no for transgender people. And one of the things we're going to be talking about today is is that changing, because there's all this... I won't bore you with the details.
Josh King:
No, bore us with the details, we geek out on this show.
Richard Cea:
But there are court cases that are going on right now that may change that, but those two criteria have been in the crux of the Human Rights Campaign because where maybe the states are not protecting individuals, companies have stepped up. And so that's been a big part of it. Other things over time that have involved and become part of the index, are you giving equal insurance benefits to LGBT families that you are to non-LGBT families?
Richard Cea:
Do you have any stains on your public record of coming out for or against certain issues? All of these things add up and totally transparently, you can see it on the HRC website to a score and we utilize that score. Because at the end of the day, I think you highlighted on this, I'm not claiming that insight shares is the expert on LGBT equality, but we found a partner that we know is because they've been in the space for so long.
Josh King:
Yeah. I've known Chad Griffin, head of this Human Rights Campaign for 25 years, since he was a young man coming out of Arkansas. And so much of their work is political efforts in Washington, DC. Did they welcome organizations like UBS coming to them and say, "Look, we want to use your scoring to create investment opportunities." And let you then talk about, if you are thinking about where to invest your money, look at a fund like UBS's.
Richard Cea:
Well, I think it's an evolution if you think about people's behavior in general. People out there who are listening to this in their everyday life, you might not buy goods from a company that you don't feel supportive of what they're doing. You might not work at a company, but would you invest in a company? Well, if you're in the S&P 500, you're probably investing in a lot of companies that you don't like what they're doing. Why are you putting your capital to work at companies that don't represent your value system? And I think, this is an extension and what our goal is really to amplify their efforts and to say, "Here's another aspect of the world, where people should be thinking about this."
Josh King:
Is HRC hip to what you're doing and supportive of it?
Richard Cea:
Oh, well, absolutely. We have an agreement with them. We're the licenser of that data, they're on board with the product. It's not something we just comb their website for the data.
Josh King:
You mentioned that your co-head of UBS pride, Eric Berger is ringing the closing bell today. You must be getting a lot of feedback, both within the firm and outside about doing this, what have you heard?
Richard Cea:
The feedback has been overwhelmingly positive from people. There's really two interested parties, investors, but all so advocates for the space. And I think it's so new still. I think it's sinking into people's brain, the power that this type of investment can have. The feedback's been really positive right out the gate and we're in about 25 million in the fund. It's early days, but we're looking to grow traction and I think we will continue to, as more people get aware of it.
Josh King:
Large banks typically are risk averse. Where did the direction for Inside Shares focus on ESG and socially responsible investing stem from, and how does it tie into larger UBS driven initiative?
Richard Cea:
Yeah. Diversity is a big initiative for UBS. And while I agree on a large scale, banks tend to be risk averse. I think banks are seeking to be leaders in a lot of these different fields around diversity. If you look at the Corporate Equality Index, it's littered with banks that have gotten 100 on that test.
Richard Cea:
And part of the reason for that is I think, one, banks want to do because it's the right thing to do. But additionally, they realize that there's a talent pool to access here. And that's a really important thing when we talk about pride, why is this an investment story? Well, one, if the employers at your company feel more comfortable, they perform better. If you already have them as employees giving them policies and an environment that makes them feel better, they'll perform better.
Richard Cea:
There're stats out there from the Human Rights Campaign, in fact, that show that up to 30% of people who identify as LGBT, but don't at work, have either missed work or not been able to talk about their social life. They don't bring their whole self to work, which is a big term that a lot of people bring out. You're missing productivity there, but even beyond that, the LGBT community makes up, depending on who you believe, between 10 million and 15 million of identified LGBT adults in the United States.
Richard Cea:
And when I think about that number, I say, "Okay, that's the population of Ohio or Pennsylvania." Imagine if your company said, "We're going to put practices and policies in place that basically make it so that we're unattractive for people from Ohio to work here." That would be a pretty silly thing to do, because you're not going to get the best engineers, the best IT people, the best lawyers at your company. And there's this talent argument, which we think long term, can drive performance.
Josh King:
What segment do you think, Rich, of the investing public are you hoping to attract these products, particularly, do you see that this is a key to unlocking millennials to invest? You and I were talking earlier about, well, a lot of young folks tended to get scared off by 2008, should I really be investing in this marketplace and looking for avenues back in?
Richard Cea:
Yeah, absolutely. I think there's broad appeal because first, and then let's talk about millennials. I remember when I was a kid, which wasn't that long ago, I'm a millennial myself, but I remember it was at the dinner table, you don't talk about your politics. You don't talk about that at cocktail parties, not that I went to cocktail parties as a kid. But those are things that you don't talk about. Whereas, now the world's totally different.
Richard Cea:
You're talking about that constantly, you're wearing it on your sleeve. I think across the investor spectrum, there is potential application for investments like PRID. But millennials are particularly an interesting case. And that's why you're seeing the industry really think about ESG more and more and what they can bring to the table. Because millennials, depending on what stats you look at, 60, 70, 80% are not invested in the market.
Richard Cea:
Some of them saying they'll never invest in the market, which is not a good retirement strategy for young people. We know that the market over the long term is likely to return much higher than our bank accounts. At the same time what's happening, wealth is going to start to transfer to these younger people. And we're seeing stats that say the majority of millennials want their investments to be in socially conscious funds. Voila. Bring all those things together and you would expect, that if you put the right options on the table, it will encourage millennials back into the market for their own good. And of course, to bring AUM into these products.
Josh King:
After the break, Rich and I will talk about Insight Shares other recent launch and where UBS will be taking ETFs from here.
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Josh King:
Back now with Richard Cea, the Executive Director in UBS's Investor Solutions Group, responsible for their new foray into exchange traded funds. Richard, not only do you have PRID as one of your new ETFs, you also have honor ticker symbol, H-O-N-R. You'll tell me all about HONR in a second, but I guess the first question I have is you entered the finance industry at what age?
Richard Cea:
22.
Josh King:
And you were obviously an attractive candidate coming out of college for someone like Citibank, where you started, how did you begin this business?
Richard Cea:
Debatably attractive, I guess. But I think it's a great way to start to talk about what HONR is and what the investment is. Because HONR is about investing in companies that are most supportive of our nation's veterans, particularly in terms of them getting employment, post their active duty. And I immediately think about myself, as somebody whose not a veteran, who didn't serve the country. Who, coming out of college at 22 years old, studied finance, knew all the right bullet points to put on my resume and got a job in an analyst program at a big wall street bank. And I was able to do that because I knew the lingo. And also, the HR departments at these firms, they knew what to look for. And they understood my resume, they could translate my resume to somebody that could work at the company. They could check the boxes.
Richard Cea:
But then I think, conversely, let's say that instead of making that choice, I had decided to go serve. I spent six years in Afghanistan and I come back at 28 and I come back with a resume that's got impressive things on it. But military jargon that your average HR person, the finance industry doesn't understand. The chances of getting the job would be radically lower.
Josh King:
Because why? You're 28 years old, rather than 22, you cost a little more?
Richard Cea:
I'm older, I probably wouldn't cost more, but I'm older, harder to mold. They might assume, they might say, "Well, he doesn't have any experience financially. We wouldn't hire a 28 year old who didn't have any experience financially to come here when we can hire 22 year old, right out of college." And frankly, they would have no idea if the things on my resume were impressive or not impressive. Because we start throwing out military jargon and titles and all these things. And just your average person is not able to follow those in a way that's critical enough to do it.
Josh King:
On the other hand, basic values like duty, honor, country have to be attractive to any employer.
Richard Cea:
Look, the bottom line is, from my perspective, that's just wrong for people to be at a disadvantage for having served the country. And that's the social aspect of this, but you're absolutely right. The companies that do this well, they do it because it's the right thing to, but again, they do it because it's a smart thing to do, because they're getting people with leadership skills. They're getting people who show that they can perform under pressure. What could be more pressure than that?
Richard Cea:
They're getting people who showed that they care and that they're willing to sacrifice for their country. You can imagine they'd be willing to sacrifice for their company as well. These are all the things that companies say they want in their employees but are they doing a good job of finding that talent pool within our veterans community? Some are, some aren't. We believe the ones that are, are on our fund, HONR.
Josh King:
Again, we talked earlier before the break, about how you created the basket of stocks that go into the PRID ETF. How are you developing the collection of equities that you would find in the HONR ETF?
Richard Cea:
Absolutely. There we work with an organization called Victory Media, who is a Navy run media company that has been publishing something called...
Josh King:
Not actually run by the United States Navy?
Richard Cea:
Yeah, former Navy guys, sorry. Good clarification there. They're run by former Naval officers. And they started this company because when they came back from active duty, they said, "There's not a lot of opportunity. People don't understand what we did." Because a lot of times people think helping veterans, it's about helping the wounded and let's face it that's the most important. Okay.
Richard Cea:
But the point that they made to me, which really resonated with me, is that as veterans they felt like they were better off for having served. It wasn't a charity issue. They felt that they could help in civilian employment. They could really make differences at companies, but they weren't getting maybe the opportunities that veterans deserved or they weren't getting looked at because they weren't coming through this natural recruiting pipeline. And so they started this company back in 2003 and they've been publishing the Military Friendly Ratings, pretty much every year since. We use that rating system to determine what companies are in the index and it has its own robust criteria.
Josh King:
Again, we start with large caps to start with, but sketch out this profile like you did for PRID.
Richard Cea:
Well, actually it's very convenient to do so, because it's quite the same. We start with a thousand largest. We do the same liquidity filters, a billion market cap, 25 million ADV. We look at net operating margin. If it's positive, you're eligible. And then we say, "Do you have a Military Friendly Designation this year or not?" And we wind up with, this case, a little different, 104 companies, it's a smaller subset, which we equal weight. Your exposures here are going to be a little bit more different than the S&P than they were in PRID.
Richard Cea:
But we still think it's a large cap alternative because what are the top 10 Military Friendly names based on their list. Names like IBM, names like Amazon and Humana and Allstate. The point being that this isn't something that, "Hey, we're putting you only into these small subset of defense stocks." We're putting you into US large cap companies. It's an alternative for that, that we think, have a chance again, because of their talent pool and the way that they run their companies, to do well, but also allow you to do good.
Josh King:
Again, like PRID people who are part of, I think the 8 million strong veteran community, that's part of the US workforce, they're not only drawing a salary, but they're making income and thinking about investments. The feedback that you've received from the veteran community about having this as an investment alternative.
Richard Cea:
And the veterans have been extremely supportive because, I think, they all live this challenge. And to know that there's an investment vehicle, which is highlighting it is valuable to them. But I think veterans affairs is a great example of a very non partisan event where everybody can support this. And it hasn't been just veterans who care about it. A lot of individuals who recognize this disparity between giving these people opportunities and not, who have served our country, are interested in the product.
Josh King:
Rich, given that it's been 25 years since State Street launched the Spider ETF, why is UBS getting into this just now?
Richard Cea:
Yeah, absolutely. I wish we could have beaten them to it. I'm only 25 years too late. But I think we see a clear niche in the market here and in demand for socially conscious investments. As we were talking about earlier, younger audiences are going to be interested in this, but really across the broad spectrum of investors who want to do good with their money, want to make the stock market work, not just for their personal accounts, although that will always be important, but also for good.
Richard Cea:
But when we look at the universe out there, I didn't believe myself, I'll just speak for myself, that there were that many products that could connect with people on a personal level. And that's what I think our Insight Shares products are capable of doing. And that's not to say anything bad about the other ESG products you're going to have traditional large cap just with an ESG filter over the top of it. And that's great. People will use that for asset allocation.
Richard Cea:
But do people connect with governance in general? Does anybody in mode on the back of that? I'm not so sure. And I think what we've been able to do here, and also because we've been so lucky to have such great partners, is bring things to market that really highlight issues and bring them of the forefront and enable people to try to make a difference with their capital.
Josh King:
And in terms of making a difference, UBS is actually putting a little bit of its money where its mouth is, in terms of some of the profit from these funds. You are making charitable investments through the UBS optimist foundation.
Richard Cea:
Absolutely. That's another key part of this. Because when we talk about doing good with your money, by investing in ETFs, what do we really mean? We mean, you are buying companies that support your values indirectly through the ETF, and that should have some positive impact on their share price. Either by pushing it up, of course, it's going to take a lot of investment to get there, but just companies knowing that people have that demand, is going to drive behavior. Because let's face it, corporations care about share price. They have to, it's just part of their DNA.
Richard Cea:
That's part of it, but it's a little indirect and we're willing to acknowledge that, but we think it will make a difference. We wanted to have a direct component as well and to exactly what you said, we're working with the UBS Optimist Foundation, which gives impact grants and it's a UBS foundation, which then gives out to individual charities. And right now we're due diligencing veterans and LGBT charities to figure out who this year will get the grant for each product. And it is, flat out, a percentage of our revenues.
Josh King:
Thanks so much Rich, for joining us Inside The ICE House today. Good luck with the closing bell.
Richard Cea:
Thank you very much for having me. We're, again, so pumped to be here.
Josh King:
That's our conversation for this week. Our guest was Richard Cea, Executive Director for UBS's Investor Solutions Group. If you like what you heard, please rate us on iTunes so that other folks know where to find us. If you've got a question or a comment, you'd like one of our experts to tackle in a future show, email us at [email protected] or tweet at us at NYSE. And Rich, if people want to find out more information about your funds?
Richard Cea:
Absolutely. Go to www.insightshares.com. That's the housing place for it all. And you'll find the contact there, you can email us and we'd love to engage with everybody and anybody.
Josh King:
Our show this week was produced by Pete Ash and Ian Wolf with production assistance from Ken Abel and Steven Portner. I'm Josh King, your host signing off from the library of the New York Stock Exchange. Thanks for listening. See you next week.
Speaker 1:
Information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ICE nor its affiliates, make any representations or warranties express or implied as to the accuracy or completeness of this information and do not sponsor, approve or endorse any of the content hearing. All of which is presented solely for informational and educational purposes. Nothing hearing constitutes an offer to sell or a solicitation of an offer to buy any security or recommendation of any security or trading practice.
