Fennel

Impact investing grew exponentially in <a href="https://www.reuters.com/markets/us/how-2021-became-year-esg-investing-2021-12-23/">2021</a>, as more people took into account how companies impact the world when deciding whether or not to invest in them. <a href="https://pressroom.ifc.org/all/pages/PressDetail.aspx?ID=18568">A 2020 IFC report</a>, estimated the size of impact investing at $2.1 trillion AUM, but it projected that the market could grow to $26 trillion under the right conditions. This growth could cause a huge industry shakeup with investors prioritizing conscientious companies, while pushing established businesses to shift their practices to meet the moment. This increase in impact investing means that a growing number of investors are interested in seeing information about companies that goes beyond just the balance sheets. They want to see ESG (Environmental, Social, and Governance) data. By reviewing data like a company’s carbon footprint, commitment to diversity in the workplace, or political donations, investors can learn about how that company affects the world at large.   <h4>Finding The Data</h4> But sometimes this is easier said than done. One challenge in impact investing is knowing what to do with all the ESG data. Traditional investors can simply look at a rising stock price, but if you want to evaluate a company based on its effect on society, you need ESG screening. The perfect company doesn't exist, but ESG screening helps you invest in the companies that are closest to your ideals. It’s essential to think about what issues are most important to you, so you know what to look for in a company and what to avoid.   <h4>Accentuate the positive, eliminate the negative</h4> Once an investor figures out the issues important to them, it becomes easier to look for  companies that match those ethics. This could be a company with female leadership, a company drastically reducing its carbon footprint, or a company that speaks out against laws that limit equality. Actively choosing companies to invest in based on their beneficial ESG impacts is called <a href="https://www.robeco.com/en/key-strengths/sustainable-investing/glossary/positive-screening.html">positive screening</a>. On the opposite side, there may be certain practices that make you want to avoid or divest from a company. For example, a company could be a significant contributor to climate change, or could be known for unethical business practices like using child labor. Actively avoiding companies that have a harmful ESG impact is called <a href="https://www.robeco.com/en/key-strengths/sustainable-investing/glossary/negative-screening.html">negative screening</a>. Define what’s unacceptable for you and invest accordingly. ESG investing involves a combination of positive and negative screening, but some companies and industries are in transition, which makes it harder to put them in the positive or negative column. For instance, a large automobile manufacturer might be in the process of transitioning towards renewable energy usage, but they might still have a large carbon footprint, and thus are unlikely to be ESG leaders. Because outcomes vary across industries, investors might use a best-in-class philosophy and make investments that encourage companies transitioning towards more sustainable practices but aren’t there yet. That’s why data provider <a href="https://www.msci.com/">MCSI</a> rates companies as Leaders, Average, or Laggards. When impact investing, you may want to avoid a laggard, but some upper-end “average” companies could show potential, especially with more conscientious investors taking part in shareholder votes.   <h4>Decoding The Data</h4> Finding and understanding ESG data on your own can be complicated. Without third-party verification, it’s difficult to know whether a company’s sustainability efforts are misrepresented, or whether a company is making unsubstantiated claims. The <a href="https://ec.europa.eu/commission/presscorner/detail/en/ip_21_269">European Commission surveyed</a> numerous company websites for businesses in the consumer goods space. The commission found that of the 344 “green” or “eco-friendly” claims made by those companies, 42% of those claims could be labeled as exaggerated, false, or deceptive — and thus “could potentially qualify as unfair commercial practices under EU rules.” That’s why there are a handful of analytics companies that dig through self-reported and public regulatory data in order to compile a company’s ESG information. The analytics companies will then take this data and create a company rating or ESG score. While there is no standardized rating system, at Fennel we use data collected by <a href="https://www.refinitiv.com/en">Refintiv</a>, as well as <a href="https://www.refinitiv.com/en/sustainable-finance/esg-scores">its ESG scoring system.</a> ESG ratings make this data more accessible for everyday investors, making it easier for them to align their personal ethics with the companies they invest in. Through impact investing and ESG screening, investors are showing companies what they prioritize and how they want to shape the world.   ∙ ∙ ∙ The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Securities offered through Fennel Financials, LLC. Member <a href="http://finra.org">FINRA</a> <a href="https://www.sipc.org/">SIPC</a>.

What Is ESG Screening?

Screening is one way to incorporate ESG into your portfolio.

Sean Cameron

01 Aug, 2022

3 min read

You’ve done your research. You’ve analyzed a company’s finances — its price-to-book, earnings per share, forecasted revenue, etc. You’ve even checked out several of its ESG data points to see if there were any glaring risks. You’re ready to invest. But when you find the company on the Fennel app, you notice that it’s down 4% that day. Your research showed you that this was a good investment. Is this 4% decline a bad sign? Or is it a buying opportunity? What’s going on? That’s where news comes in. The price of stocks and ETFs fluctuate every day. Sometimes this is due to market swings or macroeconomic conditions, but other times these swings are related to something specific that’s happening right now. Staying up-to-date on the news can help you learn more about what the market or an underlying company is going through, which may help inform your buying or selling decisions. That’s why Fennel has integrated a news feature directly into the app. We’re excited about providing in-app news to our users, especially because it was one of the most asked for features by our beta testers.   First, here are some details you should know about the Fennel news feature: <ul class="ul1"> <li class="li1">The news feature appears in a few different places — You’ll see text that says “News” on your portfolio screen, in your watchlists, when you go to a company’s detail page, and when viewing company industry lists. Tapping on “News” or scrolling down will show you the news that relates to the company you’re looking at, or multiple companies if you’re looking at a watchlist or industry.</li> <li class="li1">News articles are added real-time — You’ll get access to news as it breaks, live updates to articles, and be able to view articles that are up to a year old.</li> </ul> Integrating news into an investing app is relatively common, so what is it about Fennel’s news feature that makes it unique? Two things: filtering and sentiment analysis.   <h4 class="p1">ESG labels and filters</h4> Since the team at Fennel believes that ESG can help investors become more informed about the companies they invest in, we’ve also integrated ESG into how we show news. If you’ve spent some time analyzing the Fennel ESG wheel, you’ve probably noticed that Fennel provides ESG data across ten different categories. You can view a full list of those <a href="https://fennel.com/fennel101/4">ten categories here</a>. However, these ten categories appear outside of the ESG wheel as well — including in the news feature. When Fennel’s news feature algorithm notices that the information in a given article relates to one of those ten categories, you’ll see one of Fennel’s ESG icons listed on that article. For example, an article about a senior executive departing a company may show the “Executive Leadership” icon because of how that news relates to this category. You’re also able to filter news stories based on these ESG categories, so if you’re looking for articles that talk about “Green Technologies” you can turn on filters and search for them.   <h4 class="p1">News sentiment analysis</h4> If you see a news article in the Fennel app, you may see that it says “positive,” “negative,” or “neutral” at the top. What does this mean? The Fennel app is able to show whether the general sentiment of that article is positive, negative, or neutral. Keep in mind that this sentiment analysis applies to the article as a whole and not to how an individual company or security is talked about (although, that’s a feature that may come in the future). This sentiment analysis is NOT a recommendation to buy or sell a specific security, instead it’s meant to be a helpful tool to better understand the news. How does this sentiment tool work? The news feature algorithms analyze the language used in the article, and then determine whether that language falls into one of three buckets (either positive, negative, or neutral). The article will then get a sentiment rating based on the proportion of language that falls into each bucket. Not every article is given a sentiment rating, but we hope that when it does appear it can help people understand the news. Fennel is continuously expanding its news features, so stay tuned as we add more functionalities!     • • • The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Employing ESG strategies may not result in favorable investment performance. Securities offered through Fennel Financials, LLC. Member<a href="http://finra.org/"> FINRA</a><a href="https://www.sipc.org/"> SIPC</a>.

This Just In... Fennel's In-App News

Here's what you should know about Fennel's real-time news feature.

Fennel

04 May, 2023

2 min read

You may already know that owning stock means owning a portion of a specific company. That ownership often entitles you to vote on important business decisions for that company. These decisions range from who to appoint to the company’s board of directors, how much the CEO should be paid, who should conduct a company’s internal audit, and so on. But it can also include high impact decisions, like whether the company should use sustainable packaging or whether it should test its products on animals. <h4>How do I vote?</h4> In order to vote, shareholders must own a company’s stock on its record date. A record date, or date of record, is a specific date that a company will tabulate everyone who owns shares in order to determine who can vote. That means if you owned shares for several months but sold before the record date, you cannot vote. But if you bought shares days before the record date, you can. Shareholders are able to vote their shares at company shareholder meetings, which are usually held once per year on a date picked by the company. Shareholders are given advance notice when a shareholder meeting will happen. These meetings often occur in person, with shareholders invited to join or call in. If a shareholder shows up to one of these meetings they can vote in person. If a shareholder can’t attend the meeting, they can instead make their voice heard through a process called proxy voting. This refers to when a shareholder casts their vote through another person or firm (i.e. a “proxy”). In these cases, the shareholder will be provided with proxy materials, so they can record their votes on ballot measures and send them in via mail, phone or online forms (i.e. to “vote by proxy”). This is done before the shareholder meeting, so the proxy has time to record the results and deliver them during the meeting. It’s also worth mentioning that the ability to vote is dependent on the account in which you own stocks. Some brokers will lend out an investor’s shares to other parties, thus giving the ability to vote to that other party. If this happens, you won’t be able to vote your shares. This practice is called “securities lending” and is somewhat common for brokerages that offer margin accounts. (Fennel does not lend out your shares.) Fennel acts as a proxy for its users who want to participate in shareholder votes. The app shows you upcoming votes, and enables you to vote on the ballots for which you qualify as a shareholder. It also shows more information leading up to big votes, and shows which votes passed and which ones didn’t. If you want to see what’s at stake with these shareholder votes, stay up to date through Fennel’s in-app voting page. <h4>What are different “classes” of shares?</h4> <h4>And what are the implications for voting?</h4> It’s common for shareholders to get one vote for each share they own, but this isn’t always the case. Sometimes shares don’t come with any voting power, sometimes they come with multiple votes per share. This difference in voting power is designated in a share’s stock class. Stock classes allow companies to offer different kinds of shares, which are often categorized into Class A, Class B, and Class C shares. Companies differentiate these types of shares in order to assign different characteristics to each class. For example, a company may offer one class of stock that comes with dividends, and other classes that do not. A company may offer more shares of one class than another class, which could cause them to trade at different prices. Sometimes a company offers one class of stock to the public and another to private investors. Much of this depends on the company issuing the stock. But one reason a company might offer different stock classes is to provide different voting rights to their shareholders. Let’s say Company X offers Class A shares to the public with one vote per share. That company may also designate certain shares as Class B shares that come with 10 votes per share, and then make these shares only available to early investors and its executives. This would help certain shareholders maintain greater voting power during shareholder meetings. A number of companies offer different classes of stocks with different voting rights, so it’s worth checking what type of stocks you own if you’re hoping to participate in shareholder votes.

What is Shareholder Voting?

You may already know that owning stock means owning a portion of a specific company

By Fennel

18 Jul, 2022

2 min read

How a company acts affects more than just its product or its bottom line, it affects the world around it — for better or for worse. Conscious consumers are paying attention to these actions and using that information to decide whether they want to support those companies. For example, if you hear that a restaurant underpays its workers, you might avoid eating there out of principle. If you find out a large paper manufacturer is dumping dangerous chemicals into a nearby river, you may buy your notebooks elsewhere. Or you might choose support companies that <a href="https://www.nytimes.com/article/russia-invasion-companies.html" target="_blank" rel="noopener">have pulled out of Russia</a> after the country invaded Ukraine, and <a href="https://fortune.com/2022/03/25/besides-koch-industries-halliburton-and-subway-which-companies-are-still-operating-in-russia-more-than-you-might-think/" target="_blank" rel="noopener">boycott the ones that haven’t</a>. Holding companies accountable can go beyond deciding whether or not to buy their products. It can also extend to deciding whether or not to invest in them. This is often referred to as impact investing, which <a href="https://www.investopedia.com/terms/i/impact-investing.asp" target="_blank" rel="noopener">Investopedia defines</a> as “a general investment strategy that seeks to generate financial returns while also creating a positive social or environmental impact.” Impact investing requires us to understand how a company impacts the world. But companies’ impacts aren’t easily defined. Corporations make countless decisions every day. Certain decisions are well publicized, while others fly under the radar. Some decisions are trivial, and others can affect entire communities. This is why <a href="https://www.gartner.com/smarterwithgartner/the-esg-imperative-7-factors-for-finance-leaders-to-consider" target="_blank" rel="noopener">a growing number of investors</a> have been turning to a framework called ESG to assess whether or not a company operates responsibly and ethically in relation to the environment, society, and its corporate governance. ESG stands for the following: <ul> <li>Environmental — Focuses on how a company treats the environment and preserves natural resources</li> <li class="pt-2">Social — Examines how a company manages relationships with its employees, partners, and customers, as well as the communities it’s part of.</li> <li class="pt-2">Governance — Deals with a company’s leadership, board of directors, executive pay, audits, internal controls, shareholder rights, and other topics related to how a company is run.</li> </ul> Each pillar incorporates a wide variety of information in order to evaluate a company’s impacts. Within the pillars, there are subcategories that focus on specific facets of how a company operates. For example: <ul> <li>“Renewable Energy Use” falls within the Environmental pillar.</li> <li class="pt-2">“Child Labor Controversies” falls within the Social pillar.</li> <li class="pt-2">“Board Gender Diversity” falls within the Governance pillar.</li> </ul> There are dozens of subcategories that make up each pillar of ESG. With all of these factors to account for, some ESG data providers use numerical scores to help people understand how companies stack up against one another. For example, Fennel gets its ESG data from <a href="https://www.refinitiv.com/en/financial-data/company-data/esg-data" target="_blank" rel="noopener">Refinitiv</a>, which gives companies an ESG score out of 100 (you can <a href="https://www.refinitiv.com/en/sustainable-finance/esg-scores" target="_blank" rel="noopener">check out this page</a> for more information on Refinitiv’s scoring). At Fennel, we take this information and make it accessible for investors — so you can see how companies affect the world. With this, you can decide how you want to affect the world through your investments.

What is ESG?

How a company acts affects more than just its product or its bottom line, it affects the world around it — for better or for worse

By Fennel

18 Jul, 2022

2 min read

At Fennel, we believe that individual investors should have access to as much data as the traders on Wall Street do. That’s why we’ve packed all that ESG, financial, and shareholder voting information into our app. But, we also acknowledge that a lot of data can be overwhelming at times, especially when it comes to financial data. This data can tell you about the health of a company’s business or the performance of its stock, but it also involves understanding a fair amount of terms and numbers. That’s why we’ve put together this glossary as a cheat sheet to help you remember what all the financial terms measure and mean. With this glossary, we hope you feel well-equipped to invest based on the metrics that matter to you. (For a rundown on Fennel’s ESG data, you can <a href="https://fennel.com/fennel101/4">read our explainer here</a>.)   Annual Revenue Annual revenue tells you how much money a company generates by selling its products or services over the course of a year. Fennel gets this information by looking at the net revenue or net sales that a company generated in its most recent fiscal year. Revenue differs from profit because it doesn’t include the expenses that a company had to pay in order to generate that revenue. If you subtract a company’s expenses from its revenue you’ll get its net income or net profit.   Beta Beta is a measurement that represents a stock or ETF’s volatility. To measure this, beta compares how much the price of that security changes relative to the broader market on average. The market, which is usually represented by a benchmark like the S&P 500 or Russell 1000, is given a beta value of 1.0. For example, if the security’s price tends to experience similar percentage changes as the broader market (on both up and down days), it’ll have a beta value close to 1.0. If the security’s price swings more wildly than the broader market, it’ll have a beta value greater than 1.0 — the higher the value, the greater the variance. But if the security moves less than the broader market on average, its beta value will be less than 1.0.   Change on Day This measures how much the price of a stock or ETF has changed between the close of the prior trading day and where the price is currently. This change can be represented by either a dollar amount ($) or by a percentage (%).   Dividend A dividend is a sum of money that a company pays out to its shareholders in regular intervals (often quarterly) as a way to share its profits. If an investor is interested in collecting dividends, they may also want to know about a company’s dividend rate and dividend yield. The dividend rate is the company’s annual dividend payment per share (as determined by the company). Sometimes, if you hear an investor talk about a company’s “dividend” in terms of dollars per share — as in, “this company pays a dividend of $1.22 per share” — they are actually talking about its dividend rate. The dividend yield, on the other hand, is a ratio that describes how much the dividend pays out relative to that company’s share price (as a percentage). So, if a company’s share price is $10, and its dividend rate is $1.22 per share per year, the dividend yield is 12.2%. Some ETFs pay out dividends too if the underlying assets in that ETF pay dividends.   Earnings Per Share (EPS) Earnings per share is a calculation used to help estimate a company’s value. EPS takes a company’s net profits (which, as mentioned above, is annual revenue minus expenses), then subtracts the company’s dividends (also mentioned above), and then divides that total by the number of outstanding shares. Thus, this calculation gives investors an estimate of how much the company is earning per share. The Fennel app includes both actual earnings per share, which uses company reported earnings from previous fiscal years to calculate EPS, as well as estimated earnings per share, which calculates EPS for the current and next fiscal year based on what analysts estimate earnings will be. (These analyst estimates are provided by FactSheet).   Enterprise Value Enterprise value is another calculation that can help investors figure out how much a company is worth. A company’s enterprise value is equal to its market capitalization (the number of shares times the share price), plus the company’s debt and minority interest, then minus the company’s cash. It can be seen as slightly more comprehensive than market cap because it takes a company’s debt and in hand cash into account.   Last Price This is a stock’s or ETF’s most recent share price, either from the current or most recent trading session at close.   Market Capitalization Market Capitalization (often shortened to “market cap”) aims to calculate a company’s total equity value. It does this by multiplying the company’s share price by the number of outstanding shares. Sometimes, investors classify companies by size using market cap. Companies are split into small cap (when market cap is less than $2 billion), mid cap (when market cap is between $2 billion and $10 billion), and large cap (when market cap is greater than $10 billion).   Open / High / Low These are three different price measurements for the current, or most recent trading session. Open refers to the share price at market open. High refers to the highest value that the share price reached during the trading session. And low refers to the lowest value that the share price reached.   Price This one may seem self-explanatory, but price refers to the current or most recent share price in US dollars. It’s often used to calculate other financial metrics, such as market capitalization or price-to-book.   Price-to-Book (P/B) A ratio that is used to compare a company’s market value (the price that its shares are trading at) to its book value (the value of the assets on its balance sheet minus liabilities). P/B is calculated by dividing the company’s current share price by the most recently reported book-value-per-share. P/B can also be calculated for ETFs by taking the weighted average of the P/B values for that ETF’s underlying holdings (i.e, stocks).   Price-to-Earnings (P/E) Another ratio, price-to-earning compares the company’s share price to its annual earnings per share (EPS). Another way to think about P/E is to view it as how much an investor pays to get a dollar’s worth of company earnings. It’s also sometimes referred to as the “earnings multiple.” P/E can be calculated as trailing P/E (which uses a company’s reported EPS from its most recent fiscal year), or as forward P/E (which uses EPS estimates calculated by analysts for the current fiscal year).   Sector A way of classifying companies by the industry they operate in (or where their revenue comes from). The Global Industry Classification Standard (GICS) is responsible for classifying companies by their sector. To learn more about the 11 different sectors, you can <a href="https://fennel.com/fennel101/5">read our blog post here</a>.   Theme Another way of classifying companies based on the area they operate in. While sector can be seen as the type of business a company is, the theme has more to do with industry trends and the company’s area of focus. Themes may be more specific than sectors. For example, Information Technology is one of the 11 sectors, but Cybersecurity is one of the themes listed in the Fennel app.   Total Debt to Equity Ratio As hinted in the name, this ratio is calculated by dividing the total debt a company has by the most recent value of the shareholders’ total equity, and then multiplying by 100. This measurement can also be used to tell investors more about how leveraged a company is (since it compares how much the company owes in relation to its equity value).   Volume Volume refers to the total number of shares that are being traded. Volume can be calculated for the current trading period (referred to as today’s volume), the most recent trading period, or can be averaged out over time. For example, Fennel calculates a security’s average daily volume by taking the mean of a security’s volume over the most recent 30 days. Some investors look at a security’s volume as an indicator of its activity or momentum. It stocks are being trading more frequently, that may tell you more about the popularity of that stock, or if large transactions are being placed.   52-Week Range The 52-week range tells you how much a security’s price has moved (roughly) over the past year. It’s calculated by comparing the highest price that security reached over the past 52 weeks (the 52-week high) to the lowest price (the 52-week low).   *ETF Terms* Fennel allows investors to buy and sell both stocks and ETFs. While stocks represent shares of a single publicly traded company, exchange-traded funds (ETFs) act as a pooled investment, which can represent several different underlying stocks or assets.   Since ETFs differ from stocks, we’ve included a few terms that are used in the Fennel app to provide data about ETFs. Investors should consider carefully information contained in an ETF’s prospectus or, if available, the summary prospectus, including information about investment objectives, risks, charges, and expenses. You can request a <a href="https://www.schwab.com/etfs/investor-information">prospectus</a> by contacting customer support. Please read the prospectus carefully before investing.   Assets Under Management Sometimes abbreviated as AUM, this refers to the total market value of all an ETF’s holdings.   Expense Ratio ETFs don’t just appear out of thin air, they are usually created and managed by some organization. The expense ratio refers to the operating costs that it takes to manage an ETF’s portfolio (for things like management fees, marketing, distribution, administration, distribution, and other expenses). These expenses are then expressed as a percentage of the fund’s average net assets.   Number of Holdings This refers to the number of underlying securities held in an ETF. Some ETFs consist of many different underlying stocks, others may have less, while some ETFs only have one (known as single-stock ETFs).     ∙ ∙ ∙ The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Employing ESG strategies may not result in favorable investment performance. Securities offered through Fennel Financials, LLC. Member<a href="http://finra.org/"> FINRA</a><a href="https://www.sipc.org/"> SIPC</a>.

Fennel’s Glossary of Financial Terms

Beta, enterprise value, expense ratio ... what does it all mean? Here are definitions for the terms you'll see in the Fennel app.

Fennel

30 May, 2023

5 min read

In any market, investors are always looking for the next edge. If I were a pinstripe-suit-wearing Wharton graduate, I’d say that investors are looking for “new ways to <a href="https://www.investopedia.com/terms/a/alpha.asp" target="_blank" rel="noopener">generate alpha</a>” (or ways to outperform the market). Whether it’s complicated options trading, long-term buy and hold strategies, or finding the next great company no one else has heard of, many investors look for ways to increase returns consistently year-over-year. However, there’s one often overlooked method that might be right in front of you: securities lending. <h4>Defining Securities Lending</h4> So… what is securities lending? Strictly speaking, it’s when a firm (often a brokerage firm) loans out the securities in its portfolio (like stocks, bonds, ETFs, etc.) to other investors. In exchange for loaning these securities to them, <a href="https://www.blackrock.com/lu/individual/education/securities-lending" target="_blank" rel="noopener">the borrower stakes collateral to the lender</a> (this can come in the form of an upfront cash payment, other securities, or something else), and <a href="https://www.investopedia.com/terms/s/stock-loan-fee.asp" target="_blank" rel="noopener">pays an interest rate fee</a> over the course of the borrowing term. <h4>What is Short Selling?</h4> Before we get into the nitty gritty of securities lending, let’s quickly chat about the other side of the transaction. Many investors borrow securities in order to engage in something called short selling. While it might take a pinstripe suit and a Wharton degree to truly master short selling, here’s a metaphor to help you understand the fundamentals: Let’s say that the new iPhone is releasing in a week, and you think there will be a surplus of used iPhones as people cash in their old models to buy the new one. You have a theory that this will lower the value of each unit in the immediate future. You know a friend with a spare iPhone, so you offer to borrow it from him for a fee. You give him a small collateral, and pay him 10 cents per day in fees for his troubles. You immediately turn around and sell that iPhone to someone else for $100. Now you have $100 in cash, but you still owe your friend one old iPhone. Well, your prediction comes true and used iPhones fall to $50 in value when the new one is released a week later. You now buy a used iPhone back for $50, then give it back to your friend that originally lent you the first one. You now owe nothing to anyone, and you walk away with $50 in cash, minus the fee you paid to borrow your friend’s phone. That, my friend, is the essence of short selling, except investors do this with stocks and other securities instead of iPhones. Investors who engage in short selling are betting that a security will fall in value, so they borrow the securities, sell them, and hope to buy them back at a cheaper price so they can return them and pocket the difference as profit. <h4>Why is Securities Lending a Thing?</h4> Now, back to securities lending. Although borrowers can make money through short selling, the firms that lend out securities get paid their lending fee and get their securities returned in the end. This means that securities lending could be one way for firms to turn a profit if they have a large number of securities that would otherwise be sitting in their portfolio untouched long term. The act of investors trying to maximize their investments is nothing new, and neither is securities lending. The practice has been around for decades. In the 1920s-1930s, <a href="http://www.econ.yale.edu/~shiller/behfin/2001-05-11/jones-lamont.pdf" target="_blank" rel="noopener">the New York Stock Exchange even had a public “loan post”</a> that served as an early in-person securities lending stand. Securities lending became more formalized in the 1960’s, when traders in London began to take advantage of new runs on investors pouring into short sales. From there, the toothpaste was out of the tube. Securities lending, as a business, was in full swing. And by “full swing,” I mean that <a href="https://www.rbcits.com/assets/rbcits/docs/news/2020/TheEvolutionSecuritiesLending-Transcript.pdf" target="_blank" rel="noopener">RBC estimated in 2020 that there is over $30 trillion in securities enrolled in lending programs</a> around the world. <h4>Why Lend Your Securities?</h4> Well, as we mentioned above, investors are looking for that extra revenue in their portfolios. That can be generated by lending your securities to someone that is looking to execute a short sale, as described in the iPhone example above. Additionally, thanks to fixed fee rates dependent on security demand, it’s potentially one way to drive a bit of extra cash. If you’re a big bank or financial body, however, then securities lending takes on a bit of a new meaning: liquidity. Take for example the European Central Bank. Since 2015, the ECB has been <a href="https://www.ecb.europa.eu/mopo/implement/app/lending/html/pspp-lending-ecb.en.html" target="_blank" rel="noopener">purchasing billions in public bonds</a>, that they then lend out to other investors at a fixed fee of 5 basis points (aka 0.05%) for securities, or a 20 basis point (0.20%) discount rate for collateralized cash. Essentially, this accomplishes two missions for the ECB: 1) The ECB becomes a market maker for public bonds; and 2) It’s able to drive additional revenue to the balance sheet through lending fees. In this example, the ECB has access to cash that would be otherwise tied up in bonds. <h4>The Downsides to Securities Lending</h4> In the case of the individual lender, there are some downsides to securities lending. As with all investing, lending securities involves risk. There’s a risk that the borrower may go bankrupt. In that case, the lending broker is <a href="https://www.investopedia.com/ask/answers/05/shortsalebenefit.asp" target="_blank" rel="noopener">on the hook to return the shares</a>. There’s also a chance that the lender may miss out on price fluctuations while the securities are loaned out. If you loan your shares out at $10 per share, then they jump to $20 while they’re loaned out, then drop back to $12 when you get them back, then you’ve missed out on some significant unrealized gains. It’s worth noting that when stocks are loaned out, <a href="https://uk.practicallaw.thomsonreuters.com/7-503-0989" target="_blank" rel="noopener">the title and ownership</a> of these stocks are transferred to the borrower, meaning that the lender doesn’t have control of the shares until they are given back. While the obvious result of this would be that the lender can’t trade stocks that are loaned out, it also means that the lender can’t do other things with these shares on loan — like use them to participate in shareholder votes. Whoever owns the shares on <a href="https://www.investor.gov/introduction-investing/investing-basics/glossary/ex-dividend-dates-when-are-you-entitled-stock-and" target="_blank" rel="noopener">the record date</a> is the one able to vote those shares. This means in some cases, <a href="https://www.sec.gov/spotlight/proxyprocess/proxyvotingbrief.htm" target="_blank" rel="noopener">the borrower could get the right to vote</a> if they hold the shares on the record date. There have been some instances where institutional investors <a href="https://www.wsj.com/articles/SB116978080268188623" target="_blank" rel="noopener">borrow shares to swing votes</a>. Separately, if the borrower participates in a short sale and sells the shares in order to buy them back later, the investor who bought the shares from the borrower <a href="https://www.investopedia.com/ask/answers/05/shortsalevotingrights.asp" target="_blank" rel="noopener">gets the right to vote</a>. Either way, the votes follow the shares and the original owner won’t be able to vote with shares that are loaned out. Another downside is that if loaned shares are used for short selling, it <a href="https://avgjoefinance.com/shorting-affect-stocks-price/" target="_blank" rel="noopener">puts downward pressure on the stock price of the shares being loaned</a>. Essentially, this means the borrower is betting against the lender that could be looking to hold these shares for the long term. The lender could see the value of their securities depreciate. <h4>How Do I Lend My Securities?</h4> So now you know that brokerage firms can lend out securities, but how do you, a retail investor, lend your shares? The harsh truth is you might be lending them out without even knowing. Brokerages have the ability to lend out shares to investors, which sometimes involves lending out shares that are in the portfolios of their retail investor clients. Meaning that your brokerage may have the ability to lend out your shares. While <a href="https://www.tdameritrade.com/investment-products/fully-paid-securities-lending-program.html" target="_blank" rel="noopener">some</a> <a href="https://www.ally.com/do-it-right/investing/what-is-fully-paid-securities-lending/" target="_blank" rel="noopener">brokerages</a> <a href="https://www.fidelity.com/trading/fully-paid-lending" target="_blank" rel="noopener">advertise</a> that they allow their users to enroll in securities lending, some retail investors might not know whether they are lending their stocks or not. How come? Well, remember when you signed up for your brokerage account and there was that thing you scrolled to the bottom of and pressed “I Accept” so you could get to your <a href="https://www.oed.com/view/Entry/37827540" target="_blank" rel="noopener">YOLO</a> options trades quicker? Well, that’s called the “Terms and Conditions” and some brokerages include your consent to lend securities within that document. If you’re wondering whether your broker has the ability to lend your shares, look for the term “fully paid securities lending” in the Terms and Conditions you signed. The unfortunate truth is, you may have given your consent unknowingly in that document. Brokerages are able to do this with retail investor clients <a href="https://www.investopedia.com/ask/answers/05/shortsalebenefit.asp" target="_blank" rel="noopener">who own margin accounts</a> with them, and your consent for this <a href="https://www.sonnlaw.com/faq/can-my-broker-lend-my-shares/" target="_blank" rel="noopener">might be located in the hypothecation agreement you have to sign</a> when opening a margin account. Between the Terms and Conditions, hypothecation agreement, or your expressed consent form, you may have yelled consent in a few different ways to your brokerage of choice (if they opt to do securities lending). Brokerages make money when they lend securities. Sometimes they <a href="https://blog.robinhood.com/news/2022/5/4/introducing-stock-lending-at-robinhood" target="_blank" rel="noopener">pass some of that profit to the individual investors</a> who are getting their securities lent. But even if you’re getting paid to lend out your securities, it’s worth weighing the downsides of securities lending — like losing access to your shares, not being able to use them to vote, and having short sellers bet against you — in order to determine if it’s worth the price. If you do discover that your brokerage is lending your securities (and essentially your shareholder vote) and it’s not something you’re comfortable with, the next step could be switching to a brokerage that doesn’t lend securities. If you are comfortable with it, it could be worth doing some research to see which brokerages pay the best rates for lending out your securities. Either way, they are your shares, so what you choose to do with them should be up to you. <div class="d-flex justify-content-center pt-4"> <div class="purple-dot"> </div> <div class="pe-2"> </div> <div class="purple-dot"> </div> <div class="pe-2"> </div> <div class="purple-dot"> </div> </div> The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Fennel refers to Fennel Markets, Inc., and Fennel Financials LLC. Securities offered through Fennel Financials LLC, member <a href="https://www.finra.org/#/" target="_blank" rel="noopener">FINRA</a>/<a href="https://www.sipc.org/" target="_blank" rel="noopener">SIPC</a>.

What is Securities Lending?

In any market, investors are always looking for the next edge

By Nick Burgess

18 Jul, 2022

6 min read

Sometimes, comparing companies is a lot like comparing apples to oranges. Sure they’re both fruit, but they have fundamental differences and you wouldn’t necessarily swap one for the other when following a recipe. Investors have come up with plenty of ways to classify different companies to make comparisons easier, and one of those methods is classifying companies based on their sector. Sectors are broad groups that classify companies based on their industry and what products or services they provide. Although there are a few different frameworks for defining companies by sector, Fennel uses the <a href="https://www.msci.com/documents/1296102/11185224/GICS+Methodology+2020.pdf/9caadd09-790d-3d60-455b-2a1ed5d1e48c?t=1578405935658">Global Industry Classification Standard (GICS)</a>. GICS was developed by Morgan Stanley Capital International and Standard & Poor’s in 1999 to provide investors with a way to clearly define different industries, and then classify securities based on those industries. According to GICS, there are currently 11 different sectors. Here’s a list of all of them, as well as some examples of each:    • Energy (e.g., oil, gas, and coal companies)  • Materials (e.g., chemical producers, mining companies, and paper product manufacturers)  • Industrials (e.g., transportation companies, capital goods, and commercial & professional services)  • Consumer Discretionary (e.g., apparel companies, luxury goods providers, and restaurants)  • Consumer Staples (e.g., food, beverage, and household product companies)  • Health Care (e.g., pharmaceutical companies, healthcare providers, and biotech companies)  • Financials (e.g., Insurance companies, banks, and mortgage lenders)  • Information Technology (e.g., software companies, tech hardware, and equipment producers)  • Communication Services (e.g., wireless carriers, media companies, and publishers)   • Utilities (e.g., water utilities, electric utilities, and renewable energy producers)  • Real Estate (e.g., property management and development companies, real estate services, and REITs)   Sectors are meant to be broad enough that pretty much every company falls into one of these 11 categories. <a href="https://www.msci.com/documents/1296102/11185224/MSCI_GICS_Overview.pdf/cfdc73ec-9704-1685-7742-96bf2c3ec699">Over 58,000 trading securities</a> have been classified by the GICS framework (representing about 95% of the world’s equity market capitalization), and each one has been assigned to a sector. Sectors are also just the tip of the iceberg within the GICS system. The 11 sectors are then broken into 24 industry groups, 69 industries, and 158 sub-industries. This allows GICS classifications to get more specific when defining exactly what industry a company falls into. For example, the company Harley-Davidson is in the consumer discretionary sector, automobiles & components industry group, automobiles industry, and motorcycle manufacturers sub-industry. You can get down to this level of specificity for any company within the GICS framework, but the sector level is the most broad classification.   Why should investors pay attention to sectors? One reason investors look at sectors is to diversify their portfolio. As a general rule of thumb, diversification of your portfolio can help you <a href="https://www.nerdwallet.com/article/investing/diversification">avoid risk or market volatility</a>. Investing across multiple market sectors may mean you’re less susceptible to this risk. (Important Risk Disclosure: Diversification does not ensure a profit and may not protect against loss in declining markets.) Hypothetically speaking, let’s say a recession means people are more careful with their personal spending habits. This could affect companies in the consumer discretionary sector, like luxury good sellers or automobile manufacturers. Meanwhile, companies in the consumer staples sector, like food and beverage companies, may be less affected. If an investor’s entire portfolio consists of companies in the consumer discretionary sector, their portfolio may take a hit. But if that investor has their portfolio spread out across multiple different sectors, they might be shielded from some of that volatility. However, some investors may choose to look at sectors in order to focus their portfolio on just one industry — essentially doing the opposite of diversification. If they believe that macroeconomic conditions will cause one sector to outperform the others, they may allocate more of their portfolio to that sector. For example, although the S&P 500 is down for the year, <a href="https://www.yardeni.com/pub/peacockperf.pdf">the energy sector has actually grown</a> due to various reasons like the Russia-Ukraine war and demand for fossil fuels. If a savvy investor somehow predicted this trend and invested solely in the energy sector at the start of the year, they would have outperformed someone who spread their portfolio evenly between all sectors. In this scenario, the energy investor opted to take the riskier, less-diversified approach in an attempt to get higher returns. Besides diversification, looking at sectors can help investors make comparisons between different or similar companies. This can be extra useful if the investor considers ESG data when making investments. For example, if an investor is looking at the carbon footprint of oil company X, it might not be fair to compare it to software company Y. That’s because the business operations of these two companies are fundamentally different. Instead, it would be fairer to compare oil company X to other companies within its sector. Sectors can also make ESG screening easier. If an investor is looking to remove companies that do animal testing from their portfolio, it probably makes more sense to look at companies in the consumer staples sector (food companies, agriculture companies, personal product manufacturers, etc.) than it would to screen for animal testing in the financials sector. Additionally, companies that provide ESG scores or ratings may take sectors or industry groups into account when calculating those scores. Again, this is because it often makes more sense to compare similar companies when determining ESG performance. If you look at <a href="https://fennel.com/fennel101/4">the Fennel ESG wheel</a>, you’ll notice that the ESG scores and data points provided compare the specific company you’re looking at to other companies within the same industry. There are plenty of other reasons to consider sectors when investing, whether that’s analyzing market trends or understanding your portfolio’s sector exposure. But even if you don’t take sectors into account when investing, understanding what they are can give you some more insight into the market at large. • • • The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Employing ESG strategies may not result in favorable investment performance. Securities offered through Fennel Financials, LLC. Member<a href="http://finra.org/"> FINRA</a><a href="https://www.sipc.org/"> SIPC</a>.

What Are Sectors?

Sectors can help you understand the industry of the companies you invest in.

Fennel

15 Dec, 2022

4 min read

While the digital age revolutionized most of the investing process for retail investors, one legacy feature that held on for dear life was commissions. Traditionally, brokerages used commissions to charge consumers for access to the markets. Even as more brokers were conducting business online, popular brokerages were still charging $5, $10, even $20 per trade. That is, until a handful of young tech-forward brokerages came along with a new business model that changed the industry: commission-free trading. But how do these brokerages still manage to make money, despite not charging a commission? That’s where a revenue stream known as “payment for order flow” (PFOF) comes in. By making money through payment for order flow, brokerages can get away with not charging commissions. But this practice isn’t without controversy. In fact, <a href="https://www.sec.gov/news/press-release/2020-321">the SEC determined</a> that Robinhood’s use of PFOF from 2015-2018 “misled customers” — resulting in customers <a href="https://www.reuters.com/business/finance/robinhood-pay-65-mln-fine-settle-sec-charges-misleading-customers-2020-12-17/">paying higher prices to execute trades</a>. So what exactly is PFOF, and why has it suddenly become a topic of conversation in investing circles?   <h4>What is Payment for Order Flow?</h4> Strictly speaking, <a href="https://www.cfainstitute.org/-/media/documents/issue-brief/payment-for-order-flow.pdf">payment for order flow involves a market maker paying a brokerage for the right to execute their trades</a>. As dry as that is, it’s pretty important to understand for the average retail investor. The concept of PFOF actually isn’t new. The practice dates back a few decades and was even used by Bernie Madoff (yes, that same Bernie Madoff) <a href="https://fortune.com/2021/03/01/robinhood-trading-app-free-trades-pfof-stock-market/">back in 1991</a>. PFOF was pioneered as another way for large trading funds, known as “market makers,” to generate business with a specific brokerage. The process is actually pretty straightforward: the market maker approaches a brokerage to be their primary trading house for buying and selling securities. The market maker, in return for the business, pays the brokerage fractions of a cent for each share they buy or sell. While that doesn’t sound like much, the volume of shares trading hands per day means that this payment to the brokerage can be <a href="https://www.theblockcrypto.com/post/93321/robinhood-payment-for-order-flow-2020">hundreds of millions of dollars</a>. While the brokerage is getting paid through the nose by the market maker, the market maker is benefiting on the other side by taking advantage of the difference between the buy and sell prices of securities. This difference is called the “bid-ask spread” and can be anywhere from fractions of a cent to several cents per share. Since the market maker handles both sides of the buy-sell transaction, they get to pocket the difference. Theoretically, the market maker is making a return on their investment on top of what they’re paying the brokerage, which is what makes PFOF appealing to both brokerages and market makers.    <h4>Arguments For PFOF</h4> PFOF, in general discourse, is viewed in a …not so positive light. In fact, PFOF is illegal <a href="https://www.cfainstitute.org/en/advocacy/policy-positions/payment-for-order-flow-in-the-united-kingdom">in the UK</a> and <a href="https://www.reuters.com/article/us-retail-trading-canada/canada-stock-market-rules-curb-platforms-linked-to-churning-u-s-stocks-idUSKBN2A92NC">Canada</a>. However, there are some valid arguments in adopting the practice. The first is one we’ve already touched on: PFOF brings in additional revenue for the broker, which can allow the broker to eliminate commissions on trades. For Robinhood, <a href="https://www.barrons.com/articles/robinhood-stock-middle-ground-51635357928?mod=article_inline">this model generates a whopping 75% of their total revenue</a>, which allows them to avoid charging commissions to retail investors. Zero commissions is a pretty enticing thing for the end user, who doesn't have to pay hefty fees every time they want to execute a trade. The second argument in favor of PFOF is that it helps to generate liquidity in the market. Like toilet paper in 2020, you can’t buy a stock if the inventory is unavailable. By acting as a middleman, market makers argue that they provide the necessary liquidity to keep shares moving. This is especially true in the options market, where high volumes of contracts change hands every minute.   <h4>Arguments Against PFOF</h4> Detractors of the PFOF model have some points of their own. Namely, that the routing of orders to a specific market maker creates a conflict of interest in the execution of the trade. This could lead to investors not getting the best prices on their trades, since the buying and selling is running through the same market maker, and that market maker is looking to make money on the spread. It could also create issues if the market maker is put in a tough position, like what happened in early 2021.   <h4>PFOF In The 2021 Memestock Trade</h4> Nowhere was the PFOF conflict of interest more apparent than in the memestock revolution of 2021. For those of you that lived in a Faraday Cage at this time, members of online forums like r/WallStreetBets banded together to <a href="https://cheddar.com/media/everything-you-need-to-know-about-the-gamestop-stock-saga#:~:text=The%20GameStop%20stock%20saga%20is,if%20the%20timing%20was%20right.">buy shares of GameStop, AMC Theaters, and other nostalgic companies</a>, in an attempt to cause a historic short squeeze that damaged short holders. It even drove one hedge fund that shorted GameStop <a href="https://www.forbes.com/sites/roberthart/2021/06/22/london-based-hedge-fund-closes-after-betting-against-gamestop-becoming-one-of-first-meme-stock-casualties/">out of business</a>. It was at this time that a few of the brokerages favored by the memestock traders, <a href="https://www.cnbc.com/2021/01/28/robinhood-interactive-brokers-restrict-trading-in-gamestop-s.html">turned off the buy function</a> for some of these stocks. This deeply upset traders, and many <a href="https://www.wsj.com/articles/citadel-securities-faces-new-pressure-over-gamestop-frenzy-11632863151">accused the market makers</a> of telling brokers to turn off the buy function so the market makers could minimize the damage against their short positions — thus the conflict of interest.  The public outrage even led to some of the more high-profile figures being forced to testify in front of Congress about the issue. Both Robinhood CEO, Vlad Tenev, and Citadel CEO, Ken Griffin, <a href="https://www.nytimes.com/2021/03/17/business/gamestop-hearing.html">had to testify</a>, but not too much happened as a result. Even though <a href="https://www.pcmag.com/news/robinhood-now-faces-over-30-class-action-lawsuits-for-blocking-stock-buys">over 30 class actions lawsuits</a> were filed against Robinhood, <a href="https://www.reuters.com/business/court-dismisses-claims-robinhood-wrongly-restricted-meme-stock-trades-2022-01-27/">several of these claims are being dismissed</a> by federal courts.  But the spectacle put a spotlight on PFOF that has yet to go away. Congress also held a second hearing on PFOF, which eventually led <a href="https://www.cnbc.com/2021/10/19/sec-chief-gensler-says-regulator-assessing-payment-for-order-flow.html">new SEC Chairman, Gary Gensler, to further discuss “the future” of PFOF revenue</a> — leading some to wonder if <a href="https://www.nasdaq.com/articles/exploring-the-secs-bid-to-ban-payment-for-order-flow%3A-what-could-replace-pfof-2021-10-21">PFOF will be made illegal</a>. Then in June 2022, over a year after the memestock episode, Gensler made it seem like <a href="https://www.reuters.com/markets/us/wall-street-regulator-spell-out-push-overhaul-stock-trading-sources-2022-06-08/">PFOF’s days may be numbered</a>. The future of PFOF is up in the air, but at the end of the day, interacting with PFOF is not a necessity of online investing. While some brokerages partake in payment for order flow, others do not. Each person will view PFOF differently, so it’s up to you to do your own research and determine which platform is right for you.   ∙ ∙ ∙ The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Securities offered through Fennel Financials, LLC. Member <a href="http://finra.org">FINRA</a> <a href="https://www.sipc.org/">SIPC</a>.

What Is Payment For Order Flow?

Some brokerages use payment for order flow to generate extra revenue, but at what cost?

Nick Burgess

07 Sep, 2022

5 min read

Let’s say you want to invest in companies that share your values. You’ve heard about <a href="https://fennel.com/fennel101/esg">Environmental, Social, and Governance</a> (ESG), and want to incorporate ESG data into your investing strategy. Now, where do you begin? ESG spans across three main pillars, from how a company affects the environment, to how it treats its employees and communities, and how its leadership runs the organization as a whole. If you take a step back, you’ll realize that there’s a lot of information that goes into each one of these three pillars, and it can be hard to take it all into account. You want to learn more about a company’s diversity? Are you interested in gender or ethnic diversity? Diversity across all employees or across leadership? What about diversity in the board of directors? What about pay gaps across certain demographics? It’s easy to get lost in all the data. That’s why we’ve developed the Fennel ESG wheel, giving you an overview of a company’s ESG impact and the ability to dive deeper.   An ESG Report Card Think about the Fennel ESG wheel as an ESG report card. The wheel measures ESG performance across ten different categories, and then provides <a href="https://fennel.com/glossary">a score</a> from 0 to 100 (the higher the score, the better the performance) for each category. It also takes the average of these ten categories to create a total ESG score. The ten categories on the wheel are meant to highlight important ESG issues that an investor may want to know about. Here’s what they are and what they measure: 1. Carbon Footprint (Environmental) — the amount of emissions a company puts into the environment, as well as the steps it takes to curb those emissions. 2. Green Technologies (Environmental) — if a company’s products are eco-friendly, and therefore helps customers reduce their environmental impact. 3. Resource Use (Environmental) — how a company uses raw materials, energy, and/or water responsibly, and if it looks for more efficient solutions. 4. Workforce Equity (Social) — things like job satisfaction, workplace safety, diversity, equal opportunities, and professional development. 5. Human Rights Protections (Social) — how a company respects the fundamental rights determined by international human rights conventions. 6. Corporate Giving and Ethics (Social) — if a company operates morally by avoiding fraud, anti-competitive practices, and public health controversies. 7. Product Responsibility (Social) — how a company’s products impact their customers’ well-being or safety. 8. Executive Leadership (Governance) — the diversity of a company’s board of directors, how executives determine their own compensation, and whether there are any controversies among a company’s leaders. 9. Shareholder Rights (Governance) — shareholder voting rights, poison pill and golden parachute policies, and insider dealings controversies. 10. Corporate Social Responsibility (Governance) — how a company incorporates financially-, socially-, and environmentally-ethical practices across its business.   Using the ESG Wheel for a Single Company Ready to see the ESG wheel in action? Think of a company that you want to learn more about. Then, go to the “Explore” tab in the Fennel app, type in that company’s name in the search bar, and tap on it when you see it come up. This will pull up the company’s profile page. Scroll down a little bit until you see “ESG Rating” and the ESG wheel. The ESG wheel has a number in the middle, which represents the company’s total ESG score. This score is calculated using the company’s ESG performance across all ten categories compared to other companies in the same industry. You’ll also see if that company’s ESG data reporting is low, medium, or high compared to other companies. From there, you have the ability to tap any one of the ten categories to learn about the ESG data relevant to that field. If you tap the “Carbon Footprint” category you’ll see that company’s emissions targets, total CO2 emissions compared to revenue, e-waste reduction efforts, and the percentage of waste that company recycles. You’ll also see how these numbers compare to other companies in the same industry, and whether that company has high, medium, or low data coverage compared to others. You’ll also see if that company doesn’t report any data for one of these fields. If you want to explore even further, tap the “i” icon to see all the metrics that are used to calculate that category’s ESG score. Each one of the ten categories includes a lot of data, so we encourage you to explore a bit to see what else you can learn.   Using the ESG Wheel for Multiple Companies This is a good way to analyze a single company’s ESG data in detail, but what if you want to see ESG data for your portfolio as a whole? The ESG wheel also appears when you want to look at combined ESG data for multiple companies — whether that’s the companies in your portfolio, a specific ETF, or a watchlist you’ve created. This information is compiled by Fennel, and can help provide insight into ESG performance on a high-level. If you’ve already invested in multiple companies, you can see what a combined ESG wheel looks like by going to your portfolio. The ESG wheel that appears here will take a weighted average of all the companies you’ve invested in and give you combined ESG scores. This combined ESG wheel will show you the same ten categories, except instead of comparing the data to companies in a specific industry, it’ll compare that data to <a href="https://www.investopedia.com/terms/r/russell_1000index.asp">the Russell 1000</a> — a market benchmark that tracks the 1,000 companies in the U.S. that have the largest market cap. This is helpful if you want a quick temperature check to see if your portfolio or watchlist is more “ESG-friendly” when compared to the rest of the market. Understanding the Data While ESG scores can be useful for understanding ESG efforts at a glance, it’s important to understand the data that informs these scores. Fennel uses ESG data and scores from <a href="https://www.refinitiv.com/en">Refinitiv</a>, which aggregates publicly-disclosed information relevant to ESG performance metrics. These metrics are then used to calculate scores and averages. You can read more about the methodology behind these calculations <a href="https://www.refinitiv.com/content/dam/marketing/en_us/documents/methodology/refinitiv-esg-scores-methodology.pdf">here</a>. Because ESG scores are just the tip of the rapidly-melting iceberg, it’s worth taking into account the underlying data if you want to learn more about a company’s ESG performance. By sifting through this data, you may find specific metrics that are interesting to you — like if that company is involved in any child labor controversies or how much the CEO makes compared to the average employee. The ESG wheel may show that a company has a high or low score, but it’s helpful to dig into the data to understand why. The true value of Fennel’s ESG wheel isn’t the numerical scores it gives you. It’s the ability to have ESG-relevant data that’s easy to comb through and accessible in one place. With this information readily available, it may be easier to start investing in companies that align with your values.

What Is the Fennel ESG Wheel?

Think of the Fennel ESG wheel as an ESG report card.

Fennel

15 Sep, 2022

5 min read

Odds are, you downloaded Fennel because you want to pick the stocks and ETFs in your portfolio. You want to use Fennel’s access to data to do your own research. Or maybe you want to vote your shares in accordance with your beliefs. Now, Fennel just released a new feature to give you even more control over your portfolio — custom order routing. What does that mean? When you want to trade a security through Fennel, you place a buy or sell order that your brokerage (us) then has to complete. This involves finding a counterparty (i.e. a buyer or seller) for your order. But there are a handful of different trading venues that your order can go to in order to find a counterparty. You probably already know about stock exchanges like the New York Stock Exchange or NASDAQ, but stock exchanges are just one type of trading venue. There are also alternative trading systems, dark pools, single dealer platforms, and others. Each of these trading venues come with their own potential benefits. Fennel’s custom order routing feature lets you decide the type of trading venue your order gets sent to. So if you’re the type of investor who wants control over your orders, you’ll be eager to test out the new feature.   <h4>How can I decide where my orders go?</h4>   As of Fennel’s latest app update, investors will be able to access our order routing feature every time they place an order. Here’s how to use it: • Choose the stock or ETF you’d like to trade • Select “Trade” and then “Buy” or “Sell” • When you’re on the order screen, scroll down to see “Order Routing Options” • Expand the “Order Routing Options” drop down menu, and select one of Fennel’s three custom options • You can also tap the “!” icon to learn more about each of the three options and see the full list of trading venues • When ready, tap “Review” and then place your order   As mentioned above, Fennel gives you three options to route your orders. The first is Exchange Only. This is the most basic option. If you select this option, your order will be routed to the 16 stock exchanges Fennel works with, and executed at the one best suited for your order. The next is Exchange + ATS. This option routes your order to the 16 stock exchanges in the Exchange Only option, as well as 26 alternative trading systems. These ATS’s act similarly to exchanges, but they are not exchanges and do not meet the requirements of an exchange. ATS’s are operated by broker dealers and must be approved by the SEC prior to operating. Sometimes, these ATS’s are “dark”, which means they allow traders to stay anonymous until after the trade is executed. Sometimes, these ATS’s offer access to better prices than available on the exchanges. The final option is Exchange + ATS + SDP. This option provides access to the venues mentioned above, as well as 7 single dealer platforms. Single dealer platforms are trading venues operated by a single broker dealer or market maker, where they act as the main counterparty for each order that comes in. This is Fennel’s default order routing option, because it routes your order to the largest number of trading venues. This means you have access to more opportunities for better price discovery and potential best execution. Although Fennel’s default routing option may be good enough for many investors out there, we wanted to provide our users with the ability to pick and choose based on their own preferences. Only want your orders going to “lit” stock exchanges? Go for it. Want to get access to dark pools when you trade? Sounds good to us. Think market makers can offer you the best price through an SDP? That’s your call. If you opened a self-directed brokerage account with Fennel, there’s a good chance it’s because you want to have control over your portfolio. Our custom order routing feature is just one way to give you even more control. • • • The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Employing ESG strategies may not result in favorable investment performance. Securities offered through Fennel Financials, LLC. Member<a href="http://finra.org/"> FINRA</a><a href="https://www.sipc.org/"> SIPC</a>.

Decide Where Your Orders Go With Fennel's Order Routing Feature

Fennel is giving you even more control over your portfolio by letting you decide how your orders get routed.

Fennel

04 Oct, 2023

3 min

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