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The Daily Brief

Are Your Clients Exposed to Gun Stocks?

If they own small-cap index funds, chances are they are exposed, but they have a de minimis impact on investment returns, says Morningstar.

Recent deadly mass shootings in El Paso, Texas, and Dayton, Ohio, have sparked a national debate over gun control in the U.S. And it may have some clients questioning their exposure to gun manufacturers. For those invested in U.S. small-cap index funds, it may be more than you think, according to a new analysis by Morningstar.

Jon Hale, head of sustainability research for Morningstar, says $2 out of every $3 in U.S. small-cap funds are in indexed funds, which include the two publicly traded gun manufacturers American Outdoor Brands and Sturm, Ruger. Further, funds that are classified “total market” or “extended market” also include these two companies.

Most active funds don’t have exposure to the two, he says.

But American Outdoor Brands and Sturm, Ruger account for such a small fraction of the assets in small-cap index funds that any impact on investment performance would be de minimis.

From Hale’s analysis:

"To illustrate, let’s take a look at how these two stocks would have affected returns of the Vanguard Small-Cap Index fund over the last three years. The fund posted an 11.01% three-year annualized gain through July 2019. This was a terrible period for both AOBC and RGR, which lost 31.08% and 3.86% on an annualized basis, respectively. By my estimate, those losses reduced the index fund’s returns by barely 0.01% on an annualized basis.

Hale doesn’t go as far as saying it’s worth it to exclude gun makers from a portfolio. “It may be enough to know that an exceedingly small portion of your investment return comes from your indirect investment in gun makers via funds,” he says. “But if you want to avoid guns completely, on principle, it’s not hard to invest that way.”

He lists a number of funds that exclude these stocks. Mass shootings often draw attention to such exclusionary, socially responsible investment (SRI) funds.  

He also points to asset managers’ efforts to engage with companies on issues of gun violence, and he argues that such engagement on systemic issues “should be an obligation.”

“The misuse of guns has spillover costs on many other companies that they hold in their portfolios, as well as on society at large,” Hale says.


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