This ETF only invests in women-led companies — and is expected to rise 20% this year

Published Tue, Mar 7 20236:21 PM ESTUpdated Wed, Mar 8 20237:15 AM EST

The Hypatia Women CEO ETF , which only invests in companies led by women, is based on an index that has outperformed its benchmark by more than 20 percentage points over the past five years. The U.S.-listed ETF began trading earlier this year using the ticker WCEO and was set up on the investment thesis that the "female factor" outperforms, according to Patricia Lizarraga, managing partner at asset management firm Hypatia Capital. Lizarraga, whose background is in investment banking and private equity, said her experience with female leaders had shown her that they possess strong business acumen and leadership skills. She noted that institutional barriers to female candidates for top positions mean that those who do succeed have had to perform at a higher level, resulting in better overall performance. The WCEO ETF is created to isolate this "female factor" by investing solely in women-led companies. "We created an algorithm, that in our view, would come closest to isolating the female factor," Lizarraga told CNBC Pro . "Once we had that algorithm, if you will, then we created a backtest, going back five years, which gave us an index." This index has outperformed its FT Wilshire US Small Cap Index benchmark by more than 20 percentage points over the past five years. The ETF, named after the prominent Egyptian philosopher and mathematician Hypatia, has risen by 5.63% this year, beating the S & P 500 (up 4.29%) but underperforming its benchmark (which is up 7.5%). The fund is also expected to increase by another 19.7% over the next 12 months, according to the weighted average of analyst price targets of constituent stocks compiled by FactSet. The S & P 500 is expected to rise by 14%, FactSet data shows. WCEO YTD line The fund is currently diversified with 125 stocks and replicates its benchmark's allocation at the sector and industry level. This ensures the ETF is not biased toward sectors where female CEOs may be better represented. WCEO also takes a purist approach to its investment thesis, according to Lizarraga, which means it actively omits stocks of companies with female leaders where it wasn't possible to "isolate the female factor." For example, AssetMark Financial was excluded as nearly two-thirds of the company is controlled by a single shareholder, the investment bank Huatai International. According to Lizarraga, such an ownership structure could lead investors to perceive the company's board as non-independent. "We love that company, but ultimately, it is owned by its Chinese shareholder," she said. "The success cannot be attributed solely to the CEO if, I believe, it is overwhelmingly controlled by another company." Lizarraga hopes that the WCEO ETF will enable investors to improve their allocation diversity and help demonstrate that investing in women-led companies can be profitable. "What WCEO gives you is the opportunity to balance your portfolio away from being 90% male CEOs to a 50-50 environment, and you don't have to wait 132 years for equality ," Lizarraga said. In comparison, women are CEOs at 41 S & P 500 companies, according to the Catalyst, a workplace gender diversity charity, which is less than 10% of the benchmark.