Animal Spirits Podcast - Talk Your Book: Investing in Dual Impact ETFs

Episode Date: August 9, 2021

On today's Talk Your Book we spoke with Wendy Wong of New York Life Investments about investing to fight heart disease. Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.   Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits is brought to you by New York Life Investments. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Battenick and Ben Carlson as they talk about what they're reading, writing, and watching. Michael Battenick and Ben Carlson work for Ritt Holt's Wealth Management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Ritt Holt's Wealth Management. This podcast is for informational purposes only and should not be relied upon for investment. decisions. Clients of Rittholds wealth management may maintain positions in the securities discussed in this

podcast. Ben, did you know that the human heart beats 100,000 times a day? What if I said yes? Would that changed this anecdote? No, I did not know that. Now, you know, and I have been taking my health care seriously lately. My catch to 5K is going pretty well. I'm not going to lie. I think the pandemic, it's kind of done two opposite directions to people. Some people got a little lazy because it was easy to get lazy and they went one way and they probably gained the COVID-15 or whatever it's called. And other people decided, okay, I'm going to use this as an opportunity to get healthy. But wouldn't you say that the biggest reason you've had a more healthy lifestyle is because you're working from home now? Isn't that an unintended consequence for you that you had more time and energy to do that? there's no doubt. But I will say that I've slipped a little bit. My eating's got an out of control. We were out to dinner Thursday night. I mean, you saw what went on. My eating's got an out of hand. But my health, like my fitness has absolutely picked up. So for example, Ben, I went to my Verizon store today, my local Verizon store, and I ran home, phoneless. No phone, no AirPods. I don't know why that's relevant to the story. But I ran home and I ran, ran. Not like a jog. I ran home. I ran. All right. It's not as impressive

as I thought. 0.3 miles. But... Whoa. Hey. But wait. It doesn't give me the decimal,

second decimal. I think it's closer to 0.4. I can't prove it. But no, but the point is it wasn't a jog. I ran 0.3 miles at a decent pace, probably like an 8-minute mile pace.

And there's no way that I would have been able to do that prior to me upping my heart consciousness with my couch to 5K at. Okay. One of my favorite stats. I think you actually even recommended this book to me. It's called The Doritos Effect.

It talks about how people's tastes change over time. But she had the stat in here. The author, it said, according to the CDC, 13% of Americans were considered obese in the 60s. It was pretty similar in the 70s. By the 80s and 90s, it was like 30%. And now today, more than two-thirds of Americans are considered overweight or obese. The kicker was between 1989 and 2012, Americans spent $1 trillion collectively on weight loss solutions. So we spent all this money on weight loss solutions and our health only got worse. And I think part of the reason for that is that crappy food just became easier and cheaper and more convenient and pretty much everywhere, right?

A few years ago, I went to six flags and I noticed, like it seems like everybody is overweight. It's an American thing too. When I was in Europe, every time you go to Europe, you see that. that, wait, there aren't as many overweight. I think it really is an American thing. But wait a minute, wait a minute. Convenient fast food and stuff exist around the world. How come we're the fat ones?

I don't know. I think it's, all right, we probably watch more TV. I don't know. But I think that actually, like, technology companies can help solve a lot of this. If they make it easier and more convenient to track your health and have simple weight loss solutions, I think that there are companies that can help with this going forward. Well, also, I think that speaking from an expert lens over here, you got to prevent it's easier to prevent weight gain than to take it off once it's already on.

Oh, for sure. Yes. I think that's the thing with most diseases. So for today's show, we're going to talk to Wendy Wong from New York Life Investments. And they put together this new ETF called Heart. And some of the stats they send us ahead of time, it's like 650,000 people in the United States alone die from something related to heart disease. It's by far the biggest killer in the United States every year. This is a dumb question. What are the heart disease deaths? Because the only one that I'm familiar with is heart attacks.

You're asking the right. I didn't say Holiday Inn Express last night. I'm not exactly sure. But obviously the heart controls everything happening in the body, right? The knee bones connected to the leg bone. I get it. So we talk about this was a new script on ESG investing too, where it's not only a fund that's looking at investing in these values, but it's also giving back.

I thought that was cool to see. And I've never heard of this before, where they're giving. back from their expense. Yes. Time stamp this, Ben, if you will. There's going to be way more products like this that are niche focused ESG, targeted ESG, as opposed to like the broad base and you start screening stuff out. And if it's really impacting hundreds of thousands of people a year, it would make sense

that people who have had family members impacted by it that would want to get into this. So she teased the fact that they're going to have more of these dual impact ETFs in the future and it couldn't quite say yet. But I think you can probably guess some of the stuff, cancer and, some neurodegenerative diseases like Parkinson's and Alzheimer's, that sort of stuff, that seems like an easy one for them to do. So anyway, I think this idea is really, really cool. I'd never heard of anyone doing this before, and you're right. I think it's going to be something that continues to happen because it's a way to give back in a way where you're not only giving out of your pocketbook,

but match to your investment. So here's our interview with Wendy Wong. We're joined today by Wendy Wong. Wendy is the head of sustainable investment partnerships for New York Life Investment. Thank you so much for joining us today, Wendy. No, thanks so much for having me. All right. So today we are going to be talking about the heart ETF, H-A-R-T. Why did you all create this ETF? What was the thinking behind it? So I think what we're finding in consumers in general are using their dollars to influence change. About 75% of U.S. consumers say what a company is doing in terms of their social reputation

is going to influence their decision on whether or not they're going to buy the product. Maybe you, Michael and you, Ben, have experienced that as well. So these values-driven consumers will boycott brands that are not aligned with their beliefs, or maybe they might avoid certain products because of their environmental impact. And frankly, this trend is carrying over into how people want to invest their money, too. So Morning Star, for example, reports a 400% increase in the number of sustainable funds in the last 10 years. And specifically, money is going into them. So one out of every $4 in the U.S. is invested in sustainable. funds. That's a lot of capital being employed. We've conducted our own research of investors across the U.S. and learned that more than half the people, half the investors who responded identify as being values driven. And so what's different and why we created Hart is that we combine thematic investing with impact investing into an ETF, which your listeners know is an exchange traded fund. So Hart only has a strong investment story, but there's a give back component as well. Let's go into that give back component now. How exactly does that work?

Heart is created with a partner of social good. In this case, it's the American Heart Association. We're planning a suite of these. So each of these ETFs is going to be developed to be aligned with a particular do-good partner that's going to be an expert in whatever field that the ETF is. So in the case of Hart, New York Life Investment will contribute a portion of its management fees to support its social impact fund. And the social impact fund is a fund at American Heart Association, which was created in 2018. to help address health inequality. So for investors, there is an investment component, but then there's also knowing that a portion of the fund is going back to the do-good partner.

For several years now, there was a lot of talk around ESG investments, but it sounded more like lip service than anything. Even though investors were showing interest on a survey, they weren't really showing taking action with their dollars. But to your point, that has changed in a big way. It seems in like the past 12 to 18 months, money coming into ESG products has absolutely exploded. Why do you think now is the right time?

Why do you think investors are behaving that way? It's a couple of things. So one, people are looking for different ways to diversify. It used to be that people would construct their portfolios because of asset class or maybe a specific sector or geography. The world and companies, frankly, are becoming more global. So I think they're looking for new ways to deploy their money. As I mentioned before, consumers themselves are starting to develop stronger beliefs. So they're wanting to put their personal money and what they buy and stores they support in terms of entertainment and consumer goods. And that's being reflected in investments as well. I do think this is a cool idea because a lot of the other ESG stuff that we hear about,

not that there's anything wrong with it, is environmental stuff in all diversity. I haven't heard much in terms of the health space. So what was the thinking behind this? Where did this idea generate and what led you to sort of create this product? These dual impact funds, heart, which is going to be one of a suite. The dual impact is, one, we want it to have a very strong investment thesis. And then there needs to be a give-back component. So for an investment thesis, we started settling on health and well-being. We started talking to different partners. We started talking to American Heart Association. They have over 100 years of helping people live, healthier, stronger lives. And heart disease, sadly, is the number one killer in the United States and the

world. So one American dies every 36 seconds from heart disease. It's a number one killer. And a lot of people have been impacted by heart disease, either themselves or someone they know. From an investment story, the treatments for heart disease is going to continue to be in high demand because it's the leading cause of death in the world in the U.S. So as an example, Deloitte and the CDC estimate that the direct cost to treat heart disease is going to triple in five years. It's about $214, $216 billion right now. jump to 650 billion. And part of this is also demographic. We've got a large group of people, baby boomers, gen X, Gen Y, they're starting to age. Unfortunately, that will cause heart disease and treatments and research to be in high demand. The other component that's a demographic,

as people age, our metabolism doesn't speed up. At least that hasn't been the case for me. Same. Same. Ben's the outlier. All right. Good for you. He works out and actually works on his body, not made. Yeah. So if you think about 20 years ago when you were just graduating high school, you're going into college, and you think about what you ate and the exercise you did, is that better or improved than what it is now? I was eating way crappier back then, right? Is that the right answer? I think when you're younger, yeah, you think you're invincible. It's like a bagel egg and cheese sandwich for breakfast, pizza for lunch, and pasta for dinner. That's probably not sustainable. So going back to the demographic trend, as people age, there's definitely more awareness now of

eating healthier and being more active. Like in my circle of friends, someone is in CrossFit, someone is doing keto. Everyone is just in general trying to eat better and be healthier. And that's a big proponent. That's one of the big objectives of the American Heart Association because 80% of heart disease is preventable. Some of it's genetic and you can't help that. But for the most part, eating better, making better decisions, and being more active will really cut down the chances. And if you don't share those things on Instagram, then it didn't happen, right? Keto, the CrossFit.

I actually think that the timing for this is kind of perfect because obviously health in some manner has been on everyone's mind for 18 months now. And the numbers in that you share that 650,000 people up to our impact of a heart disease on an annual basis, is the idea here when the index was created, is the idea here to find companies that are helping to prevent this stuff from ever happening or to help cure it after the fact or a little bit of both? A little bit of both. So for one thing, the portfolio is made up about 80 companies right now. So you can expect a lot of health and pharma companies. So pharmaceutical companies that are spending money to either treat or look for a cure for heart disease. So they're making

stents and what have you. The other component is made up of companies that are having people live healthy and active lives. So wearables. So this has moved from being sort of like a tech specialty into the mainstream. Fitness, companies that are manufacturing fitness apparel and goods like the pods that you put on the car or Peloton, companies that offer fitness service like gym change, which were probably hurt during the pandemic given given COVID and such. But in general, companies that are focused on providing goods and services so people can make better decisions. Oh, and food and service too. So the index is also comprised of companies that are food and service beverage companies that are getting people to eat healthier. So like that mushroom coffee company

for example that I keep seeing them. I keep seeing them in my Instagram feed. No, I will not buy their mushroom coffee. Yeah. My husband actually got it and he said it's okay. It's not coffee. I think it's called mud. Mud water. Is that it? It's like a mushroom extract. Yeah, I think so. That is not going to get me to try coffee. Okay. Ben's not a coffee. drinker. Oh, can we settle? Wendy, I know you're not, disclaimer. You are definitely not a medical professional. Is coffee good for you? I feel like every other week we're seeing like conflicting reports. I'm a coffee drinker. Yeah, so true confession, I am too. So I would say yes, it's good for me. It's good for everybody's mental health around me too. Studies are commissioned by people who drink coffee.

I don't believe them. It's big coffee. Now, yeah, Ben, you might be right. So I'm looking at the portfolio and it's interesting because you've got a lot of pharma in here, like Johnson & Johnson and Novartis and all the big names. We know all those companies. But I also see Nike and Apple, and obviously Apple's making a huge push with the Apple Watch, what they're doing. And then the other one that stood out to me was Alphabet. And I thought, what is Alphabet doing here? And then I remembered, they bought Fitbit.

That's right. Fitbit is doing something interesting because they've been shown, like people that use that wear Fitbit, helps with weight loss, helps increase activity. But Fitbit itself is also doing a lot to help address type 2 diabetes. So they've invested $6 million in a company that's developing like a patch, the side of a coin to help people with glucose tracking. I was listening to, I forget which podcast, but somebody was talking about how on the Apple Watch or something like that, they're going to be able to like barely like prickle into your skin

and find like irregular heartbeat, it's like before they happen, before something like really bad happens. So it's funny to say that because Stanford and the New England Journal of Medicine actually did a study a couple years ago with Apple Watches. And they used it to help, they develop an algorithm to help people identify. who might have an irregular heart rhythm. And it was a small percentage of participants in that study who did find out they had a heart arrhythmia,

but they were able to get some additional help. So they got a patch that further helped monitor it. And then as a result, some of them were able to get the treatment that they needed. And a heart attack is known as a silent killer. A lot of times you don't know you have it, maybe because you have a heart arrhythmia or some type of blockage. So that technology is really starting to help and help prevent people from having heart attacks and other not so good things.

You know what else is becoming? I don't think it's becoming it's ready. It is a trend is sleep. There's like sleep technology now. Does that cross into like heart health? Are those companies potentially going to be a target for this portfolio one day? I think so. I mean, ring, I think is the wearable that will help track it.

But even your Apple watch, the garment, like I love my garment, that will help track sleep as well. And I think what people are starting to find is it used to be like a badge of on or like, I only get by with three and a half or four hours of sleep. And then now we realize people need sleep. It's not sustainable. So I think people are starting to take a more holistic look at their health. So what would cause something to either come into or go out of this index?

Is it some sort of score? Is there a ranking here? Or is it more qualitative? What exactly will make a change to the portfolio? This is an equity ETF. It's built by one of our boutiques. So New York Life Investment is a multi-boutique company. works for us because it allows us to work with boutiques that sort of specialize in a particular area.

So Candrium, I don't know if that rings a bell, but that's our largest boutique based in Europe. They've been doing sustainable investing for 30 years. Their first sustainable fund was in 1996. So way before it was cool and catchy here, they have been doing it. They have a lot of different screens that they look at. They have a lot of different data sources, and they take a best of a best. So they start with an investment thesis. What are some of the areas or sectors that we think are going to generate strong returns

for an investor? And then they do a lot of analytics. And then from that, they construct the portfolio. It's balanced on a quarterly basis. And then in addition, they're sort of like a bad guy screen. So if a company suddenly acts very badly or there's some type of scandal and it doesn't belong to be in the ETF that can get pulled. And we should say this is global in nature.

So Navarra is a top 10 holding. Medtronics is a top net. What I think of Nestle, I think of Nestle, I think of Nestle Crunch. Where do they fit into heart health? Nestle crunch is delicious. So 31% of the portfolio is international. And Nestle made it in because they've been reducing. They've made a concerted vocal, public effort to reduce sugar, fat, and salt in its products. And of all of the world's food and beverage manufacturers, they've ranked highest in the global access to nutrition index. So they score really well. So from a corporate standpoint, they're doing a lot to. develop foods that are healthier. Neslingrentas is so delicious. So you mentioned this is the first in your dual impact ETF space where you're not going to have an ESG fund that hopefully does them well, but you're also going to donate some of the expense ratio to help out and further the cause. Have you guys listed out what the other ones are going to be yet since this is the first

in the line of many or is that just going to be coming down the line? It is going to be coming down the line. So we are prohibited from talking about that, but we do have three more that are planned to be launched in October. So I hope to be back shortly after that. Fantastic. All right. So where does the money go? So you say that you contribute to the American Heart Association. How does that work? All right. So our contributions support American Heart Association's social impact fund. They created the social impact fund because a lot of people face health problems because of where they live and other conditions they can't control. So 80% of your health is determined by where you live.

If you live in an area and you have kids, if you live in an area and they don't have access to safe playgrounds, they're not going to be spending a lot of time outside. So only one in three kids get enough exercise. There's also food deserts, a lot of underserved areas, and 35 million Americans live in food and secure households. And so what the Social Impact Fund is, is they are addressing this health inequality

in very specific underserved communities like Flint, Michigan, like Boston, like Chicago, like the San Francisco Bay Area by addressing some of these factors. So some of it is social cohesion. Are you in a stable family? Are the adults gainfully employed? Do they have jobs? Education, housing, and then access to food. So I can give you two examples of small organizations that the Social Impact Fund is looking to fund. So again, these are not big organizations. These are small organizations working in specific neighborhoods. So there's Better Futures, Minnesota, which helps men who have been in prison, reenter society, and reenter the workforce. So Better Futures, Minnesota will give them housing, health, and workforce life coaching. Another example is

in San Francisco. It's Community Youth Center. They help low-income, diverse kids with health and wellness, with school and academic counseling, with substance and violence prevention. And they're also working with other organizations to help dress some of the race-based hate crimes too that have been happening. So we think when we were talking some, we thought this is really great work. It's really having an impact small neighborhoods that are really addressing health inequality. This is a really cool idea because a lot of times what financial advisors will tell their clients is you could either invest in ESG and have a values-based portfolio or you could take your profits from a normal portfolio and give back to charity. This is kind of cool how you're marrying those two concepts where you can

invest and give back. So to piggyback off of what Ben was saying, a lot of the ESG stuff, maybe prior to 2021, was very broad based in nature. And like it would hold Exxon, but it would hold it out of a smaller weight. So it would really like start at the broad market level and screen or tilt or wiggle this way or that way. What you're doing is very different in the sense that you're concentrating based on the idea that people can get exposure. to, are these healthcare companies or is that like a misrepresentation? It's more than health care companies. So it's fitness and wearables. It's companies that are providing services to help people active lives, but also healthcare companies too.

It's hard to get a real good feel for this sometimes because ETF flows are hard to track and know where they came from. But in your surveying of investors or talking to people in marketing this product, do you see certain demographics that are coming for these types of funds? Is it mostly younger people? Is it certain cohorts? Is it people from certain parts of the country, maybe certain companies? Do you see anything like that that would have you that there are some people who are more accustomed to buying ESG funds like this and wanting to give back? Or is it just a broad base of people?

So two things. I'd mentioned earlier that we've done our own proprietary research. And based on our research, nearly 50% of U.S. investors, our values aligned. Meaning if they hear about or if they're an advisor talks to them about an opportunity to invest in an ESG fund or ETF, which objectives sort of aligned with their values, they'd be inclined to do so. So that's 50%. The average age is 48 and a half years old and probably split across genders. But the average age is 48 and a half. But we did see representation in all ages. I mean, you would sort of think stereotypically that it might skew a little younger. That's actually not what our research found in

terms of investors. The other thing I would say is in terms of finding thematics at impact, we are looking at demographic trends. So like heart disease, because it is so broad-based, because it impacts so many people, we're also looking for people who might be interested in heart might have been personally impacted. They themselves have high blood pressure or they have a factor for heart disease. Maybe someone in their family has. So there's sort of two potential audiences is there as well. They're sort of like the demographic trend we're looking to tap into where there's going to be an investment story and a longer term investment trend. And there's a more personal. This is something I care about because I was impacted by heart disease.

I'm interested in learning more about heart. So speaking of audiences, we have a very sophisticated audience, but let's not make any assumptions. If somebody is interested in learning more or buying the ETF, where can we send them? So ETFs are easily accessible. They trade like a stock and they're available on a new brokerage platform. So what I would say is people who are interested in more can speak to their financial advisor. They can search the ticker heart, H-A-R-T, or they can visit www.hartetf.com to learn more. So three easy ways. This is great. Wendy, thank you so much for coming on today. Oh, thank you so much. It's been a pleasure. Thank you.