NACP: ESG ETF Deserving More Attention

The Impact Shares NAACP Minority Empowerment ETF (NACP), launched in 2018, is an ESG-focused fund tracking the Morningstar Minority Empowerment Index, with its non-profit issuer aiming to donate net advisory profits to the NAACP. Primarily invested in large-cap information technology stocks, NACP has outperformed its Russell 1000 benchmark by 1.05% annualized since inception with a shallower maximum drawdown. While facing higher expense ratios, low assets under management, and thin liquidity compared to larger ESG peers, NACP demonstrates competitive risk-adjusted performance, indicating that its ethics-driven ESG strategy does not hinder investment returns.

Analysis

The Impact Shares NAACP Minority Empowerment ETF (NACP) is a non-profit, ESG-focused fund with a distinct social mission, tracking an index that screens for companies empowering minorities based on NAACP criteria. Its portfolio is concentrated in Information Technology (30.6%) and consists primarily of U.S. large and mega-cap stocks (88%), resulting in a moderate value tilt with lower valuation ratios but also inferior growth rates compared to its Russell 1000 benchmark (IWB). Despite a recent 12-month underperformance of 1.33 percentage points against IWB, NACP has outperformed its benchmark by 1.05 percentage points annually since its 2018 inception, with a shallower maximum drawdown. Critically, when compared to larger, established ESG ETFs, NACP exhibits compelling risk-adjusted performance, nearly matching the top-performing peer (NULG) on a Sharpe ratio basis. However, this performance is juxtaposed with significant structural drawbacks, including the highest expense ratio in its peer group at 0.49%, very low assets under management, and thin trading volumes, which have also prevented the non-profit issuer from donating net advisory profits to the NAACP.

Key Decisions for Investors

• Investors with a specific mandate for social impact aligned with NAACP principles should consider NACP, as it offers competitive risk-adjusted returns relative to larger, more generic ESG funds.
• Potential investors must carefully weigh the fund's strong historical performance against its considerable structural risks, namely a high 0.49% expense ratio and poor liquidity, which could result in wider bid-ask spreads and challenges executing large trades.
• Given its recent 12-month underperformance and value-oriented tilt, the fund's return profile may be cyclical, warranting consideration as a long-term satellite holding for patient investors rather than a core position for those sensitive to short-term market shifts.
• Monitor the fund's asset growth, as an increase in AUM would be a key catalyst for improving liquidity and potentially enabling the issuer's non-profit mission to donate profits, thereby enhancing its overall value proposition.