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Overview

Ethos ESG's Model Impact Portfolios seek to empower you to maximize impact with a traditional direct-indexed approach, combined with investment expertise into a model portfolio.

Managed with a direct-indexed approach:

  • Ethos ESG's model portfolios are build with a direct-indexed approach, starting from and seeking to track a selected index.

Optimized for impact:

  • Portfolios combine traditional portfolio construction metrics with what we believe to be best-in-class ESG impact data.
  • Alongside tracking error, sector allocation, and other construction metrics, portfolios seek to maximize impact on various causes such as Climate Action, Health and Well-Being, or Gender Equality.

Backtested and analyzed:

  • All model portfolios are built with robust back-testing and modeling, seeking to minimize tracking error in historical performance.
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How model portfolios work

1. Start from an index or set of indexes

Ethos ESG Model Impact Portfolios start from an index or set of indexes. See individual model portfolios for the specific indexes used.

2. Set number of stocks

Ethos ESG Model Impact Portfolios typically hold between 40 and 80 stocks.

3. Set ESG causes

Each model portfolio focuses on a different set of ESG causes, such as Climate Action, Inclusive Economies, Health and Well-Being, or Education. The model portfolio construction process filters out companies that score below thresholds for the selected causes, using ratings and analysis from Ethos ESG. You can learn more about the causes included in each model portfolio on that portfolio's detailed profile page (coming soon).

4. Set negative screens

Each model portfolio applies selected ESG "screens" to exclude companies that fail certain screens that we have determined are important for that model portfolio's causes. For example the "Earth Defender" model portfolio excludes coal companies and companies with significant environment-related controversies.

5. Run the Ethos ESG Optimizer

Ethos ESG next runs its Optimizer process to arrive at an initial filtered model:

  1. Remove exclusions. Starting with the selected index or indexes, Ethos removes any stocks that rate below the minimum threshold for selected causes, that fail selected screens, or do not meet other investment criteria that Ethos ESG's Portfolio Manager has added.
  2. Add stocks by sector. Ethos starts with the n top-rated stocks for selected causes within the sector distribution of the selected index(es), where n is the number of stocks set for the model.
  3. Find optimal weights. For each stock in the model, Ethos checks increments of weight between specified min/max thresholds to find the weight that minimizes tracking error for the model overall.
  4. Substitute max/min contributors to sector error. Ethos finds stocks in the working model that contribute the most to sector error (the max difference between the weight of any one sector in the model and the corresponding sector in the index) and removes them. Ethos replaces these with stocks from the remaining pool (stocks that pass filters applied above, such as removing coal companies) that do the most to reduce sector error.
  5. Substitute max/min contributors to tracking error. Ethos finds stocks in the working model that contribute the most to tracking error and removes them. Ethos replaces these with stocks from the remaining pool (stocks that pass the filters applied above, such as removing coal companies) that do the most to reduce tracking error.
  6. Repeat. The Optimizer run calculates the tracking error, sector error, and impact rating and, if all criteria are met, stops the iteration and creates the initial model. If all criteria are not met, the Optimizer repeats the above steps.

How Ethos ESG calculates tracking error

We calculate tracking error using annual returns for the previous 5 years (updated daily) for the index and for each stock in the index. Annual returns are based on end-of-day adjusted close prices (adjusted for splits and dividends). For each of the 5 years, we first calculate the variance of weighted-average returns for the model compared to returns for the index. Ethos then calculates tracking error as the square root of the variance divided by n - 1, where variance is the total variance across the 5 years and n is the number of years (5).

6. Conduct further testing and refine the model

Ethos ESG's Portfolio Manager takes the results of the Optimizer and conducts further back-testing, scenario modeling, and other testing. The Portfolio Manager then makes any refinements they believe are necessary.

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Important disclosures

Ethos ESG's model impact portfolios use a direct indexing approach to building models, combined with human decision-making from a Portfolio Manager. Direct indexing is typically more appropriate when utilized in a taxable brokerage account and not tax-advantaged accounts. Direct indexing may offer the greatest value to clients who are in a higher tax bracket, have a long-term focus, value ESG-related customization, and/or are able to fund a portfolio with existing securities as opposed to selling all positions and reinvesting in a comingled fund. Indexes are unmanaged. It is not possible to invest directly in an index. As with any investment decision, you should ensure that it aligns with your clients' specific goals, risk tolerance, liquidity needs, tax considerations, and any other factors that might be relevant to their situation.

Keep in mind that investing involves risk. The value of investments will fluctuate over time, and your clients may gain or lose money. Tax-smart (i.e., tax-sensitive) investing techniques, including tax-loss harvesting, are applied in managing certain taxable accounts on a limited basis, at the discretion of the portfolio manager, primarily with respect to determining when assets in a client's account should be bought or sold. Assets contributed may be sold for a taxable gain or loss at any time. There are no guarantees as to the effectiveness of the tax-smart investing techniques applied in serving to reduce or minimize a client's overall tax liabilities, or as to the tax results that may be generated by a given transaction.

Ethos ESG does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. EthosESG cannot guarantee that the information herein is accurate, complete, or timely. Ethos ESG makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.