Fearless Girl is a fraud — How Wall Street abuses gender diversity to rip off public pension funds

There was a lot of publicity Wednesday around the Fearless Girl statue placed in front of the iconic Wall St. Charging Bull, in support of International Women’s Day. The statue, as has been documented basically everywhere on the internet, is intended to be a statement about advancing gender diversity in the workplace. But in reality, this is a morally bankrupt and surreptitious attempt by the statue’s creator, the asset management arm of the massive financial services company State Street, to profit off of a public protest by overcharging the public pension funds holding our nation’s retirement savings.

Now, while that sounds like a dramatic hot take, allow me to explain.

State Street basically claims to be supporting gender diversity by giving their customers the opportunity to ‘put their money where their mouth is’, as the saying goes, and invest with “impact” through the debut of a new Exchange Traded Fund with the ticker SHE. SHE tracks State Street’s brand new Gender Diversity Index. They even came out with a bold statement about it that they literally called ‘A Bold New Statement’, in case there was any confusion.

The Gender Diversity Index has more or less the same methodology as any other passive index fund investing in large market capitalization public companies, except this index also screens for gender diversity by only investing in companies which have a high ratio of female executives and board members, as explained in their prospectus. They also pledge, according to the NYTimes, to give 5% of their management fee to a gender diversity related charity called SHE Impacts. The fund debuted with just under $300 million in assets, with pledges to grow to $500 million in the coming months. So that means, with the 20 basis points (0.2%) being charged in Management Fees, State Street earns $1,00,000 every year and gives $50,000 to charity, netting them a tidy 19 basis points ($950,000) in management fees every year.

Well, nothing wrong with providing a service and charging a fee for it, right? That’s as American as apple pie! Not exactly.

You see, while 19 basis points sounds like a small number to charge for passive asset management, it’s actually almost double what State Street charges for it’s existing ETFs with similar holdings, like ONEK (10 basis points) or SPY (9 basis points). Compared to low cost fund provider’s ETFs like Vanguard’s VTI (5 basis points), which also has similar fund characteristics, SHE is almost quadruple the fees. State Street is basically telling buyers, “Hey, we’ll help you invest in your social causes, but only if we get to charge you an excessive markup.”

Well, buyer beware, right? Perhaps we should ask who these buyers are.

There’s really only one investor in SHE, a manager called CalStrs, the California Teachers Retirement System. The second largest public pension fund in the country, Calstrs has just about $200 Billion in assets under management. With a pledge to invest $500 million into SHE, that still only represents about a 1/4th of 1% of CalStrs assets under management.

Having an ETF issuer create an ETF for a specific preferred client isn’t unheard of. With competition over prices and fees already so fierce, sometimes the only way to gain a share of a big fund’s core holdings or get them to consider an issuer’s products is when that issuer offers them a bespoke service. For Calstrs, the service is public relations. They willingly allow themselves to be charged an extra 10 basis points on a $500 million dollar investment (an extra $500,000), and they get a nice write up in the New York Times and now can tell the public school teachers they represent, “Don’t worry, we’re being socially responsible.” Meanwhile, the other $199.5 Billion of their assets can continue to be invested in whatever sexist companies will earn them the highest return, regardless of social impact.

This isn’t the first time ETF issuers have catered to the social causes of their clients. For example, in late 2014 State Street created a ‘Low Carbon’ ETF called LOWC specifically to help the United Nations Joint Pension Fund to invest about $165 million (1/3rd of 1% of their roughly $50 Billion in Assets under Management) into stocks of companies with low carbon footprints.

Once again, these are not statements or commitments, they’re public relations cover. These pension fund managers are not starting a social movement, they’re throwing a bone to their investors who don’t want to believe their investments misalign with their values, and to a financial journalism industry all too happy to print a catchy headline and a rare positive story. And the ETF issuer is happy to overcharge to facilitate. After all, State Street is still content to let its real cash cows, like the $250 Billion SPY ETF, not worry about gender diversity issues or carbon footprints.

Some people may say that any progress is good progress, but what cheerleaders see as a small step in the right direction I see as a desperate attempt by State Street to manipulate a social issue into a way to skim some money off the top, curry favor with preferred customers, and get some positive PR, without having to actually make any difficult decisions about the business they’ve chosen or the ramifications of their investments. If gender diversity in the workplace is so important to State Street, why should I, or anyone else, have to pay a 100% markup to invest in it? If gender diversity is so important to Calstrs, why is it only applied to a de minimis percentage of their portfolio? These are half-measures at best, and usury practiced on public school teacher retirement savings at worst.

Look, I’m not trying to demonize passive investing with ETFs (It’s the best option for most investors, actually) or pretend every asset manager should screen for social issues, I’m just saying, don’t say one thing and do another. And for the people looking for an ally in their social cause, whether it’s low carbon footprints or gender diversity, just be aware that these financial services companies will only be there to help if it makes them money, not because they believe in the same values. So don’t be so quick to champion their PR stunts.

Anyway, let me know what you think, appreciate you taking the time to read and feel free to reach out if you have any questions or comments.

Thanks for reading,
Eric Mustin