The surge of mass shootings in the United States has forced many investors to wonder about
what’s in their portfolio. Do they own
companies that manufacture or sell guns
“Since Parkland [Stoneman Douglas
High School, where 17 people were
killed in a shooting on Feb. 14, 2018],
we’ve had more advisors asking about
how to find gun stocks in portfolios,
because it’s not easy to ferret them out,
and look for alternatives,” Jon Hale,
global head of sustainable research at
Morningstar, told Investment Advisor.
In a recent Morningstar paper, Gun
Stocks in Fund Portfolios, Revisited, Hale
explained how much gun-stock exposure
investors may have through index investing. He dissected small-cap indexes to
determine how to “take action to mitigate
that exposure or eliminate it altogether.”
For example, today only two public U.S.
companies, which would be considered
small-cap holdings, manufacture guns,
including assault weapons, in the United
States. They are American Outdoor Brands
(AOBC) and Sturm Ruger (RGR). Chances
are, said Hale, those who have investments
in U.S. small-cap portfolios have some
exposure to these gun manufacturers.
“That’s because about two out of
every three dollars invested in the U.S.
small-cap stock funds are in indexed
portfolios, which own the entire market
of small-cap stocks,” he noted.
However, investors who get small-cap
exposure via actively managed funds
are different, and Hale said most likely
not exposed to these gun stocks. He
noted that of the 500 actively managed
funds in the small-blend, small-growth
and small-value Morningstar categories,
only 24 have positions in AOBC while 32
have exposure in RGR.
Still, advisors should understand and
be able to explain to clients that exposure to these companies probably won’t
make much of a difference to their portfolio performance. It really is whether
or not the investor wants any gun manufacturers in their portfolio.
For example, mutual funds that hold
the largest number of shares in these
companies have very little exposure. In
the iShares Core S&P Small-Cap ETF
(IJR), RGR is only 0.3%.
To illustrate any material performance
impact, Hale said that the Vanguard Small-Cap Index fund, over a three-year annualized return through July 2019, gained
11.01%. The losses over the period for both
AOBC and RGR reduced the funds performance by 0.01% on an annualized basis.
Funds that do hold these stocks, albe-
I WANT OUT!
it in small amounts, include American
Funds iS Growth 1, American Funds
Smallcap World, DFA US Small Cap
Value, iShares Core S&P Small-Cap ETF,
iShares Russell 2000 ETF, Vanguard
Total Stock Market Index Fund, and
Vanguard Small-Cap Index Fund.
For investors who don’t want any expo-
sure, no matter how small, there are
funds that follow strong ESG practices
and purposely avoid exposure to guns,
tobacco and controversial weapons.
Those investors who want to avoid
guns investments, “They need to get in a
kind of fund that not only isn’t involved
in the civilian firearms industry, but
funds that have a broader purpose of
focusing on companies that address an
array of social and environmental issues
that they face in their business, and that
helps them reduce the risks that could
come from those issues and have a more
positive impact,” Hale said.
Some of those funds followed by
Morningstar include the Ariel Fund,
Calvert Small-Cap, Pax Small Cap,
Walden Small Cap and Walden SMiD
Cap. All these funds have a three-star
or higher Morningstar rating, and a four
globes or more sustainability rating.
However, these are only gun manufacturers. The largest gun retailer in the
United States is Walmart (WMT), which
is a large-cap stock and currently has
about a 0.63% weighting in the S&P 500,
“Most ESG funds don’t have Walmart
in their portfolios,” Hale said, adding
that might be due to Walmart’s potential labor and supply chain issues.
Ginger Szala is executive managing editor of
Investment Advisor. She can be reached at
By Ginger Szala
Clients Want Out of Gun-Related Stocks?
Here’s Some Advice
Morningstar’s Jon Hale discusses what funds do and don’t have exposure
to firearms and how advisors can help clients understand their options.