The ETF Betting on Women-Led Companies

Fewer than 10% of S&P 500 companies have women as CEOs. If that figure seems small, consider the number of ETFs that see the statistic as an opportunity: Among roughly 12,000 funds across the world, there may be only one focused on top women executives.

The two-year-old Hypatia Women CEO ETF (WCEO) operates on the premise that women-led companies outperform. The firm’s managing partner, Patricia Lizarraga, has focused on investing in women in leadership roles since 2007. “Our investment thesis is that women CEOs will outperform because it’s harder for them to become CEOs than the average CEO,” Lizarraga said. “You can deliver just the female performance. In our view, our investment thesis is that mathematically, there is alpha there.”

WCEO, which targets companies with at least $500 million market capitalizations and a median of $9 billion, has been flat since September 2023, (11)% over a year, and (16)% year to date, which is on par with other comparable indexes like the Russell 2000 and the S&P Midcap 400. But, distribution has been challenging, particularly in the current market, and the fund represents only about $4 million in assets.

ETF Upside interviewed Lizarraga on the current market environment and what it will take to create a “snowball effect” for future investments.

ETF Upside: How did Hypatia get started, and what led to the strategy?

PL: As an investment banker, I started noticing that the few women clients I had were, I thought, outperformers.We really started in the private space, which is what we knew. But about eight or nine years ago, we realized that we were seeing data points that pointed to female outperformance in all asset classes.

We also wanted to create a product for everybody. In the private markets, there are constraints in terms of most investors having to be accredited. We are the only public fund in the world that democratizes investments in women CEOs.

Are there themes that sum up the differences between how women and men manage companies?

Women CEOs have senior leadership teams that are 80% more female than men CEOs’ leadership teams. Women CEOs have senior leadership teams that are 36% female, so there’s still two-thirds men, but men have senior leadership teams that are 80% male, and therefore, the senior leadership teams of women are much more diverse. Why? Maybe women leaders may be more open-minded because of their lived experience. We like to talk about facts, because what’s behind the fact is a theory, and it gets political. 

The facts are women have more diverse senior leadership teams. And the facts are that women CEOs outperform. Why that is, is subject to interpretation. As you can see, we really do shy away from saying, “Women are from Mars and men are from Venus.”

Is the strategy being viewed as political in the current environment, amid the pushback on DEI?

If you think Apple’s going to outperform, you might buy the stock. If you think Tesla’s going to outperform, you might buy the stock. And if you think that women are going to outperform, then buy the stock. 

But if you don’t think women there are going to outperform, don’t buy the stock. Nobody’s forcing you to buy the stock. So, free market, right?

Have more people sought out the Women CEO ETF as a possible response to the political environment, or do you expect that they will?

We expect it. And we were seeing it in December and January. I think the fact that the market has done so poorly in the last two months is having people sit on the sidelines, because they’re scared. The market has been down for two months. The WCEO has outperformed its index by 130 basis points in February and 140 basis points in March, and that is significant outperformance of women CEOs in this environment.

As certain politicians love to say, “If you want things to change, do something.” People want to do something, but they’re terrified to do it in this market environment because the markets are blowing up, so that’s unfortunate for us. The good news is we’re outperforming the markets substantially in this downturn. 

What has been the biggest challenge for an ETF focused on women-led companies?

Our biggest challenge is distribution. Because we’re in a chicken-and-egg situation. We’re too small for the wealth management platforms to agree to do due diligence and put us on their platforms.

Everybody’s talking about the ‘great wealth transfer’ and what’s going to happen when women control more money than men. So part of what’s going on in the market, the way we see it, is there is a great information transfer. I understand social media is an echo chamber, but it seems to me that there’s a lot more information about educating women about financial literacy than there was 10 years ago, and what the research also tells us is that women and younger generations care more than men, and older generations in general, about what they’re invested in. So for us, that’s a good trend.

But we still have to be on big platforms, because those women with a lot of money are on Morgan Stanley, Goldman Sachs, and Merrill Lynch. [Billionaires like Melinda French Gates and MacKenzie Scott] are transforming the way women think about themselves and their money. But neither of them have yet executed on their actual portfolio, being invested in a way that’s good for women. Both of these women could say, ‘I’m going to take the female fund managers, both in publics and in privates, and I’m going to use my portfolio, my asset allocation of my wealth, to further the cause, rather than a small piece for venture and philanthropy.’ That would be transformational for WCEO.

The women billionaires have not yet taken it in their power to create that snowball effect. It’s not that they’re not doing anything — they’re doing a lot. We’re very, very grateful. And people like Billie Jean King are really putting their money where their mouth is. She’s invested in just about everything. It’s female-focused. I’m very inspired when I study her portfolio.